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Understanding Monopoly, monopolistic markets
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Understanding Monopoly, pricing and monopolistic market
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ME TUTORIAL 4 (MONOPOLY, PRICING, MONOPOLISTIC COMPETITION)Q1. A monopoly faces an inverse demand curve, p(y) = 100 −2y, and has constant
marginal costs of 20.
(a) What is its profit-maximizing level of output?
(b) What is its profit-maximizing price?
(c) What is the socially optimal price?
(d) What is the socially optimal level of output?
(e) What is the deadweight loss due to the monopolistic behaviour of this firm?
(f ) Suppose this monopolist could operate as a perfectly discriminating monopolist and sell
each unit of output at the highest price it would fetch. What would be the deadweight loss in
this case?
Q2. A monopolist has a cost function given by c(y)= y2 and faces a demand curve given by
P(y) = 120 − y.
(a) What is his profit-maximizing level of output? What price will the monopolist charge?
b) If you, as a Social Planner, wanted to choose a price ceiling for this monopolist so as to
maximize consumer plus producer surplus, what price ceiling should you choose?
c) How much output will the monopolist produce at this price ceiling?
d) Suppose that you put a specific tax on the monopolist of Rs 20 per unit output. What
would its profit-maximizing level of output be?
Q3. A monopolist sells in two markets. The inverse demand curve in market 1 is p1 = 200 - q1
while the inverse demand curve in market 2 is p2 = 300 - q2: The firm’s total cost function is
c (q1 + q2) = (q1 + q2)2. The firm is able to price discriminate between the two markets.
(a) What quantities will the monopolist sell in the two markets?
(b) What price will it charge in each market?
Q4. Suppose a supplier can identify two distinct groups of customers, students and non-
students. The demand by students Qs and the demand by nonstudents Qn are given by
Qs = 100 – 8Ps and
Qn = 100 - 4Pn
respectively. The total demand, Qt = Qs + Qn. The supplier’s cost of Rs 2 per unit is constant
regardless of the number of units supplied.
, (a) What price maximizes profits if the firm charges everyone the same price?
(b) Show that the firm can secure greater profits by charging different prices for the two
groups than it can secure by charging everyone the same price.
(c) Graph the demand curves, the marginal revenue curves, the marginal cost curve and
highlight the equilibria.
Q5. Suppose there are five firms in the market for manufacturing LCD Screens, each
producing an equal share of the entire market output.
a. Calculate the four-firm concentration ratio for the LCD Screen industry.
b. Calculate the Herfindahl index for this industry.
Q6. Suppose the distributor charges Cinepolis Rs 50 per ticket sold to showcase the movie,
“BLACK WIDOW.” Suppose the theatre can seat a maximum of 2000 people. Suppose also
that the demand to see the movie is given by P = 100 - Q/10 in the afternoon, and P = 200 -
Q/10 in the evening.
(a) Calculate the profit maximizing price in the evening and the afternoon, and the number of
people who see each show. (Using graphs to set up the problem will be helpful)
(b) What is the amount of revenue paid to the movie distributor?
(c) Suppose that the distributor instead asks the theatre owner for a flat fee of Rs 100000 to
show the movie, with no charge per customer. Calculate whether or not the theatre owner would
prefer this arrangement.
(d) Show whether the fee per viewer of Rs 50 charged by the distributor, or the flat fee of Rs
100,000 results in a more EFFICIENT outcome.
Q7. Suppose that the demand for electricity by residential consumers is the same for all
consumers and is given by P = 10 - Q/10 where P is the price per kw-hour in Rs and Q is the
kwhours per week. Suppose that the marginal cost of supplying electricity is Rs 2 per kw-hour.
If the electricity company can charge a fixed fee as well as a price per unit, calculate the per
unit fee, the quantity of units sold, and the price charged in a week.
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