Microeconomics Homework Nine
Show your work and/or briefly explain all your answers
1. Chapter 10 - Monopoly. The following table presents cost and demand data for Joe's note taking service. Joe takes notes for students who want to skip class, and he is the only person at this University who offers such a service, so he has a monopoly (I am implicitly assuming that actually going to class is not a close substitute). Q is the quantity of hours Joe spends taking notes, and the P is the hourly price he charges. Assume (for parts a-c) that Joe is a single price monopolist - he charges all his customers the same price.
|
Q
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P
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TR
|
MR
|
TC
|
MC
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p
|
|
0
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11
|
|
-----
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4
|
-----
|
-----
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|
1
|
10
|
|
|
10
|
|
|
|
2
|
9
|
|
|
14
|
|
|
|
3
|
8
|
|
|
20
|
|
|
|
4
|
7
|
|
|
27
|
|
|
|
5
|
6
|
|
|
37
|
|
|
a. What is Joe's profit maximizing price and quantity? What is his maximum profit?
b. Is Joe in long-run equilibrium? Briefly explain your answer.
c. Is this market efficient? Briefly explain your answer.
d. If Joe could perfectly price discriminate - if he knew every customer's demand curve - what price would he charge for the first hour of note taking? What price would he charge for the second? How many hours would he spend taking notes?
e. Assume again that Joe is a perfect price discriminator and that he chooses the price and quantity to maximize profit - is this market then efficient? Briefly explain your answer.
2. In the example above showing Joe's profit maximizing output decision, you should have found that Joe sets his price above marginal cost (P > MC). We call this the monopoly mark-up. Can you think of a special case where Joe, despite being a monopoly, would find it profit maximizing to set P = MC? Assume that Joe cannot price discriminate and briefly explain your answer (hint: consider what makes Joe's case different from a perfectly competitive firm). In general, what will determine the magnitude of the monopoly mark-up (another hint: is it better to have a monopoly over bubble gum or water)?