1.The rule for maximizing net revenue (total revenue minus total cost) is: Take any action if, but only of, the expected marginal revenue exceeds the expected marginal cost. What is marginal revenue? How is it related to demand? You can test your grasp of this key concept by examining the case of Maureen Supplies, who runs a yacht dealership. She has five potential customers, and she knows how much each would be willing to pay for one of her yachts.
J.P. Morgan - $13 Million
J.D. Rockefeller - &11 Million
J.R. Ewing - $9 million
J.C. Penney - $7 Million
J.P. Kennedy - $5 Million
(a) fill in the blanks in the second column to complete the demand schedule implied buy these data
(b) fill in the blanks in the third column to show Maureen's total receipts from yacht sales at the various prices listed.
(c) fill in the blanks in the fourth column to show the extra revenue obtained by maureen from each additional yacht she manages to sell when she lowers her selling price
(d) how many yachts will she want to sell if her goal is to maximize total revenue? (don't start thinking yet about selling to different people at different prices. We'll take that up later. Assume for now that she can't get away with charging one buyer more than another) What price will she want to set?
(e) now assume that her goal is to maximize net revenue, and that the marginal cost to her selling a yacht is $6 Million. In other words, each additional yacht she sells adds $6 Million to her total costs. How many yachts will she now want to sell? What price will she want to set?
(f) if you have proceeded correctly, you should now be able to experience something of Maureen's frustration. Ewing and Penney are both willing to pay more for a yacht than it costs Maureen to sell one to them. Yet she can't sell to either without reducing her net revenue. Why?
(g) suppose now that none of her customers is acquainted with any of the others, and that she can consequently get away with charging each one the maximum he is willing to pay. Under such an arrangement, which we shall call "perfect" price discrimination, what is Maureen's marginal-revenue schedule? Fill in the blanks in the fifth column.
(h) how many yachts will maureen now want to sell?
(i) fill in her total revenue schedule under "perfect" price discrimination.
Under Perfect Price Discrimination
Price of yacht Quantity Demanded Total Revenue Marginal Revenue Marginal Revenue Total Revenue
13 Million
11 Million
9 Million
7 Million
5 Million
2. An oligopoly is a market in which a market or industry is controlled by a small number of dominant firms. Classify whether the following examples belong to an oligopoly or not. Why do you classify so? (5 points)
(a) Petroleum industry
(b) Gasoline stations in St. Louis
(c) Commercial airlines
(d) Cigarettes industry
(e) Cattle industry
3. A monopoly exists when a specific firm is the only supplier in an industry. Give two examples. (3 points)
4. A cartel is an agreement between competing firms to control prices, divide market geographically or exclude entry of a new competitor in a market. (3 points)
(a) Is a (private) cartel illegal in the US?
(b) Is an international cartel illegal?
(c) Give one example of an international cartel