4. Use the following graph of a natural monopolist to answer this next question. The graph depicts the market for a monopolist where LRATC is the long-run average total cost curve, MC is the marginal cost curve, and Demand is the market demand for the product. You are also told that the reciprocal of the slope of the market demand curve is -2.
a) Given the above information and the graph, write the equation for the market demand curve in slope intercept form. Explain how you found your answer. You will need to provide a numeric value for "A" in the above graph.
b) Suppose that this monopolist is not regulated. Explain how this monopolist will determine its profit maximizing output and price. Assume that the monopolist is a single price monopolist. After explaining the process, identify the unregulated monopolist's quantity and price on the graph labeling the quantity (F) and the price (G). Note: you will not be able to actually compute F and G - just label them on a well-drawn diagram.
c) Will the monopolist described in (b) earn positive, negative, or zero economic profits? Explain your answer.
d) Suppose that this monopolist is regulated with a MC pricing regulation. This insures that the monopolist produces the socially optimal amount of the good, but will require a subsidy for the producer since economic profits will be negative. From the graph and your prior work, identify (that is, provide a numeric value) the socially optimal amount of the good. Then amend the graph to show the amount of total subsidy this monopolist will need to receive if they are to produce the socially optimal amount of the good.
e) Suppose that this monopolist is regulated with AC pricing regulation. This insures that the monopolist produces the level of output where its economic profit is equal to zero. From the graph and your prior work, identify (that is, provide a numeric value) of the price the monopolist will charge if it is regulated to produce that level of output where the monopolist breaks even. Amend the graph to provide this numeric value.
5. Consider a market that is served by a single producer. This market has significant barriers to entry so the single producer has market power and is not likely to face any competition due to these barriers of entry. You are given the following information about this market:
Market Demand: Q = 45 - 3P MC = 3
Fixed Cost for the Producer: FC = 5
a) Given the above information, if this producer acts as a single price monopolist, calculate the following:
Profit maximizing quantity = ____________
Profit maximizing price = _________
Level of profits = ____________
Consumer Surplus = CS = ___________
Producer Surplus (remember you will need to adjust this to take into account FC) = PS =
___________
Deadweight Loss = ____________
Show your work and provide a graph to illustrate your answer.
b) Suppose that this monopolist decides to practice second degree price discrimination. The monopolist decides that it will sell its first 18 units of the good produced for a price of $9 per unit and then it will sell an additional 9 units for a price of $6 per unit. Given this information and the initial information, calculate the following for the monopolist who practices this second degree price discrimination:
Total quantity produced by the second degree price discriminator = ____________
Prices charged by the second degree price discriminator = _________
Level of profits for the second degree price discriminator = ____________
Consumer Surplus in this case of second degree price discrimination = CS' =
___________
Producer Surplus (remember you will need to adjust this to take into account FC) in this case of second degree price discrimination = PS' = ___________
Deadweight Loss in this case of second degree price discrimination = ____________
Show your work and provide a graph to illustrate your answer.
c) Compare your answers in (a) and (b). Does second degree price discrimination benefit consumers in this case? Explain your answer here and provide evidence to support your answer. Does second degree price discrimination benefit the producer? Explain your answer here and provide evidence to support your answer.
d) Suppose this monopolist is able to practice first degree price discrimination in this market. Compute the following if this monopolist successfully implements first degree price discrimination.
Total amount of the good produced in the market = ______________
PS" with perfect price discrimination (remember to account for those fixed costs) =
_______________
CS" with perfect price discrimination = _____________
Profit for firm with perfect price discrimination = _____________
DWL with perfect price discrimination = _____________
Show your work and provide a graph to illustrate your answer.
6. Kem is a supplier of dry cleaning services in her small town. She operates the only dry cleaning service and therefore has significant market power. She knows that she has two types of clients: business clients who come in regularly to have their clothing cleaned and non-business clients who have occasional garments to clean. She knows the following information:
Demand for dry cleaning services from business clients: P = 20 - 2Q Demand for dry cleaning services from non-business clients: P = 10 - Q MC of providing dry cleaning services: MC = 2
Fixed Costs of providing dry cleaning services: FC = 10
Suppose that Kem decides to treat her dry cleaning business as two separate monopolies: one providing dry cleaning services to business clients and one providing dry cleaning services to non-business clients. She can readily identify the status of each of her clients since she has been in business in this small town for a long, long time and she knows her customers well.
a) Given that Kem is going to treat these two types of customers as separate entities, what will be the profit maximizing price and quantity of the good for each type of customer? And, what will total profits be equal to? Show how you found your answers to this set of questions clearly and logically! Provide a set of graphs to illustrate your answer.
b) Now, suppose Kem would like to verify that this two pricing scheme idea in (a) actually results in her earning greater profits than if she were to simply follow a single pricing monopoly model. So, find the market demand curve. Then determine the profit maximizing quantity and price if Kem treats this market as a single market with one price for dry cleaning. What happens to the level of profits Kem earns under this pricing decision? Provide numeric values for all your work and clearly and logically explain how you found your answers. Also, provide a graph to illustrate your answer.