Monday, October 15: Monopoly and Marginal Revenue

Transcription

1 Amherst College Department of Economics Economics 111 Fall 2012 Monday, October 15: Monopoly and Marginal Revenue 1. Run the Monopoly and Marginal Revenue simulation in our lab by clicking inside the red box. {LabLink} 1a. If the monopoly produced 2,000 units, it would charge a price of $ Since a monopoly will always produce a quantity and charge a price that lies on the market demand curve, the point representing 2,000 units of output and $40.00 must lie on the market demand curve. To find a second point on the market demand curve, click on another quantity. For example, if the monopolist produced 800 units, what price would it charge? 1b. To find a other points on the market demand curve, click on other quantities. If the monopoly produced 1,200 units, what price would it charge? If the monopoly produced 1,600 units, what price would it charge? If the monopoly produced 2,400 units, what price would it charge? If... 1c. Construct a table to summarize your answers. Using your table plot the market demand curve on a sheet of graph paper. Quantity Price 800 1,200 1,600 2,000 2,400 2,800 3,200 3,600 1d. What is the slope of the market demand curve? 2a. Now, construct the monopolist's marginal revenue. If the firm produces 2,000 units, the price is $ What does the firm's total revenue equal? Suppose the monopolist now produces 2,001 units. Using the demand curve's slope, what price would the monopolist charge? To check your answer, click the "One More Unit" button. 2b. How much revenue does the monopolist now collect from the sale of the 2,001 st unit itself? What happens to the revenue the monopolist collects from the sale of the first 2,000 units? What is the net effect on total revenue? What does the monopolist's marginal revenue equal when it produces 2,000 units? 2c. Is the monopolist's marginal revenue greater than, less than, or equal to the price? Explain why the monopolist's marginal revenue and price are related in this way.

2 2 2d. Next, calculate the monopolist's marginal revenue for different levels of production: 800, 1200, 1600, etc. After performing your calculations, check them by selecting the appropriate quantity in the "Total Quantity" box and then click the "One More Unit" button. 2e. Summarize this information in a table. Round your values to the nearest dollar. From your table, plot the marginal revenue curve on the graph you used to answer question 1. Could the monopolist's marginal revenue ever by negative? Explain why or why not. Quantity MR 800 1,200 1,600 2,000 2,400 2,800 3,200 3,600 2f. What happens to the gap between the price and the monopolist s marginal revenue as the quantity increases? Explain. Quantity Price MR Gap = Price MR 800 1,200 1,600 2,000 2,400 2,800 3,200 3,600

3 3 3. A monopoly firm has two plants, Plant A and Plant B. The marginal cost curves for each plant appear above along with the demand and marginal revenue curves of the monopoly: Plant A Plant B Market MC A MC B MC A MC B D MR q A q B Q ,000 (units per day) (units per day) (units per day) a. Define the term marginal cost. b. Initially, suppose that the firm produces 300 units. The production of the 300 units is split between the plants: Plant A produces 200 units. Plant B produces 100 units. 1) What does the marginal cost of Plant A equal? $. 2) What does the marginal cost of Plant B equal? $. 3) Would it be possible for the firm to produce 300 units at a lower total cost? Yes No If yes, explain how the firm could reduce its total costs by shifting one unit of production from one plant to the other. 4) Now, generalize: i) Whenever the marginal costs of the plants are not equal, can the firm produce the same amount of output at the lower total cost? Yes No ii) Consequently, to produce output at the lowest possible cost, the marginal costs of the two firms must be.

4 4 c. Next, consider two scenarios in which the marginal costs of the two plants are equal: 1) First, suppose that the firm continues to produce 300 units. However, the production is split differently: Plant A produces 100 units. Plant B produces 200 units. i) What does the marginal cost of Plant A equal? $. ii) What does the marginal cost of Plant B equal? $. iii) What does the monopoly s marginal revenue equal? $. iv) Is the monopoly firm maximizing its profit? Yes No If no, explain how a one unit change in production could increase the firm s profits? 2) Second, suppose that the firm produces 900 units. Firm A produces 300 of these units and Firm B 600: Plant A produces 300 units. Plant B produces 600 units. i) What does the marginal cost of Plant A equal? $. ii) What does the marginal cost of Plant B equal? $. iii) What does the monopoly s marginal revenue equal? $. iv) Is the monopoly firm maximizing its profit? Yes No If no, explain how a one unit change in production could increase the firm s profits? 3) Now, generalize: i) Whenever the marginal costs of the two plants do not equal marginal revenue, is the firm maximizing its profits? Yes No ii) Consequently, to maximize profits, the marginal costs of the plants and marginal revenue must be.

5 5 Name: (please print) Box Number: