Extra Problems Sheet 3

Ch: 7 - Market Structure: Perfect Competition

Ch: 8 - Market Structure: Monopoly and Monopolistic Competition
Ch: 9 - Market Structure: Oligopoly
Ch: 10 - Pricing Strategies for the Firm

Problem 1 (Perfect Competition)

Use the below table to answer the following:

Q TR ($) TC ($) MR ($) MC ($) Profit ($)

0 0 0
1 100 50
2 200 110
3 300 180
4 400 260
5 500 360
6 600 480
1- Calculate MR and MC
2- Is the firm a perfect competitive one
3- What quantity of output should the firm produce? Explain
4- Calculate the profit at each output level to verify your answer in the previous question
Problem 2 (Perfect Competition)

Given the following cost curves for a perfectly competitive firm operating in the drinking water
bottles market.
 1- If the price was set at P1, what is the quantity that the firm should produce to maximize its
profit?
2- If the price was set at P1, what is the demand equation for this firm?
3- What is total cost TC at 100 units of output?
4- Should the firm shut down at P2? Why?
Problem 3 (Perfect Competition)

Suppose there is a perfectly competitive industry where all the firms are identical with identical
cost curves. Furthermore, suppose that a representative firm’s total cost is given by the equation
TC = 100 + q2 + q where q is the quantity of output produced by the firm. You also know that
the market demand for this product is given by the equation P = 1000 – 2Q where Q is the
market quantity. In addition you are told that the market supply curve is given by the equation P
= 100 + Q.
1- What is the equilibrium quantity and price in this market given this information?
2- The firm’s MC equation based upon its TC equation is MC = 2q + 1. Given this information
and your answer in part (1), what is the firm’s profit maximizing level of production, total
revenue, total cost and profit at this market equilibrium? Is this a short-run or long-run
equilibrium? Explain your answer.
Problem 4 (Perfect Competition)

Consider a perfectly competitive market in the short run. Assume that market demand is P=100-
4Q and market supply is P=Qs. Denoting firm level quantity by q, assume TC=50+4q+2q2 so
that MC=4+4q.
1- What is the market equilibrium price and quantity?
2- How many firms are in the industry in the short run?
3- Do firms make a profit or loss in the short run, and how much are these profits/losses?
Problem 5 (Perfect Competition)
The figure shows the cost and demand curves for a profit-maximizing firm in a perfectly
competitive market.
1- If the market price is $30, what is the firm's profit maximizing output level?
2- If the market price is $30 and the firm is producing at profit maximizing output level, what
is the amount of the firm's profit or loss? Should the firm represented in the diagram
continue to stay in business? Explain.

Problem 6 (Perfect Competition)

In a perfectly competitive market Karim, among many other producers, is producing a well-
known and highly used good called Benefit. The only data Karim gave us is Average Revenue
AR = $20.
1- What is the price of a unit of Benefit?
2- Assume that the market demand for benefit is defined by the following equation:
P = 100 – 4QD and that the Market supply of benefit is also defined by the following
equation: P = Qs. If each firm’s output is denoted by q and if Marginal cost facing any
firm is MC = 4 + 4q then answer the following questions
a- What is the market equilibrium price and quantity of Benefit?
b- What is the total cost function such that FC is 50
c- How many firms are in the industry in the short run?
d- Do firms make a profit or loss in the short run, and how much are these
profits/losses?
e- Should Karim stay in business under the available conditions illustrated in part c or
shall he quit?
Problem 7 (Perfect Competition)

Total Cost Variable Cost

Quantity MC MR
(Dollars) (Dollars)
0 $1,000 $0
 100 1,360 360
200 1,560 560
300 1,960 960
400 2,760 1,760
500 4,000 3,000
600 5,800 4,800
The table shows the short-run cost data of a perfectly competitive firm that produces plastic
camera cases. If the market price of each camera case is $8, what is the profit-maximizing
quantity?

Problem 8(Perfect Competition)

Below are the short run costs for a Perfectly Competitive Firm.

1- If the market price is $17 and the firm produces 4 units of output. Compute the firm
profit/Loss. At this level of output should the firm continue production or shut down?
2- Compute the shutdown Price? Compute the break-even price?
3- The market price is $42 and this firm is producing four units of output. What do you
recommend to this firm?
4- What is the short-run supply curve for this firm?

Problem 9 (Perfect Competition)

Use the below diagram to answer the following:

1- Is the firm operating in a perfect competitive way or is it a monopolist? Prove your answer.
2- What is the quantity that maximizes the profit when the price is 25$?
3- What is the profit of this firm at a price of 25$? Shade it on the graph?
4- Should the firm keep on producing or shut down at the price of 25$? Explain.
5- What is the breakeven price? Explain what does it mean?
6- What is the shutdown price? Explain what does it mean?
7- If the prevailing price is 40$, is the firm making a profit or a loss? And why?

Problem 10 (Monopoly)

Consider a monopolist where the market demand curve for the produce is given by P = 520 – 2Q.
This monopolist has marginal costs that can be expressed as MC = 100 + 2Q and total costs that
can be expressed as TC = 100Q + Q2 + 50.

1- Given the above information, what is this monopolist’s profit maximizing price and
output if it charges a single price?
2- Given the above information, calculate this single price monopolist’s profit.
3- At the profit maximizing quantity, what is this monopolist’s average total cost of
production (ATC)?
4- At the profit maximizing quantity, what is the profit per unit for this single price
monopolist?

Problem 11 (Monopoly)

Use the below table to answer the following:

P Q TR MR TC MC Profit
17 3 56
16 4 63
15 5 71
14 6 80
13 7 90
12 8 101

1- Fill in the table (TR, MR & MC).

2- Is the firm a perfect competitive one?
3- What quantity of output should the firm produce? Explain.
4- Calculate the profit at each output level to verify your answer in the previous question.
Problem 12 (Monopoly)

The figure below shows the demand and cost curves for a monopolist;

1- What is the profit-maximizing/loss-minimizing output level?

2- What is the price charged for the profit-maximizing output level?
3- What is the amount of the monopoly’s profit?
4- If the company were perfect competitive one, what is the quantity that maximizes profit?
Is there a profit or loss at that quantity?
Problem 13 (Monopoly)

The figure below shows the demand and cost curves facing a monopolist

Refer to the figure above shows the demand and cost curves facing a monopolist.

1- What is the profit maximizing/loss-minimizing output level? Explain.

2- What is the price charged at the profit-maximizing/loss-minimizing output level?
3- What is the profit/loss per unit?
4- If the industry was perfectly competitive, what quantity and price would maximize its
profit?

Problem 14 (Monopolistic Competition)

The following diagram shows the structure of cost and demand facing a monopolistically
competitive firm in the short run.
a. Identify the following on the graph and calculate each one.
i. Profit-maximizing output level
ii. Profit-maximizing price
iii. Total revenue
iv. Total cost
v. Total profit or loss
b. What is likely to happen in this industry in the long run?
Problem 15: (HHI )

The following table represents the market share percentage for each firm in a hypothetical
industry.
Firm A B C D E F G
Market Share 12 8 20 25 4 25 6

a. Calculate the Herfindahl-Hirschman Index (HHI) for this industry.

b. Would the Justice Department consider this industry as concentrated, moderately
concentrated, or concentrated? Why?

Problem 16 (Non Cooperative Oligopoly: Game Theory)

Firms Alpha and Beta serve the same market. They have constant average costs of £2 per unit.
The firms can choose either a high price (£10) or a low price (£5) for their output. When both
firms set a high price, total demand = 10,000 units which is split evenly between the two firms.
When both set a low price, total demand is 18,000, which is again split evenly. If one firm sets a
low price and the second a high price, the low priced firm sells 15,000 units, the high priced firm
only 2,000 units.
Analyze the pricing decisions of the two firms as a non-co-operative game.
1 - In the normal from representation, construct the pay-off matrix, where the elements of
each cell of the matrix are the two firms’ profits.
2 - Derive the equilibrium set of strategies.
3 - Explain why this is an example of the prisoners’ dilemma game.
Problem 17 (Cartel)

The following table shows the demand for Good X, which is only produced by two firms. These
two firms have just formed a cartel. Suppose that the two firms have a constant marginal cost and
an average total cost of $55.

Q P
0 100
1 95
2 90
3 85
4 80
5 75
6 70
7 65

1) What are the cartel’s profit-maximizing output and price?

2) What are the output and profit for each firm?
3) What will happen to the profits of both firms if one of them cheats and increases its
output by 1,000 units, while the other doesn’t?

Problem 18 (Optimal Markup)

Given each of the following price elasticities, calculate the optimal markup.
1 - −15
2 - −8
3 - −3
Problem 19 (Price Discrimination)

An airline estimates that the price elasticity of demand for business travelers (who travel on
weekdays) is –2, while the price elasticity of demand for vacation travelers (who travel on
weekends) is –5. If the airline price discriminates (and costs are the same), what will be the ratio
of weekday to weekend prices?

Problem 20 (Price Discrimination)

The following graph shows a firm’s demand curve, marginal revenue curve, marginal cost curve,
and average total cost curve.
 1 - If the firm charges a single price, what will be the firm’s output and profit, as well as the
consumer surplus?
2 - If the firm engages in first-degree price discrimination, what will be the firm’s output and
profit, as well as the consumer surplus?

Problem 21 (Price Discrimination)

Consider a monopoly that faces a market demand curve given as P = 100 – Q. The marginal cost
of production for this monopolist is MC = 10 and the monopolist has fixed costs equal to zero.
The monopolist has asked you to compare what happens if the monopolist is a single-price
monopolist and a perfect price discriminating monopolist. At the end of this question you will be
asked to fill out a table to summarize your findings.

1- Single-price monopolist:

Suppose the monopolist charges a single-price for its product. Given this assumption, find the
answers to the following questions:

a. What is the profit maximizing quantity and price for this single-price monopolist?
b. What is total revenue (TR) equal to for this monopolist?
c. What is total cost (TC) equal to for this monopolist?
d. What are the economic profits for this single-price monopolist?
e. Provide a graph of this single-price monopolist indicating D, MR, MC, the profit maximizing
quantity, and the profit maximizing price.
2- Perfect price discriminating monopolist:

Suppose the monopolist practices perfect price discrimination. Given this assumption, find the
answers to the following questions:
a. How many units will the perfect price discriminating monopolist produce?
b. Describe the price(s) the perfect price discriminating monopolist will charge.
c. What do economic profits equal for this perfect price discriminating monopolist? Show your
work to get this answer.

3- Fill in the comparative table.

  Single-price monopolist: Perfect price discriminating monopolist:

Price Charged
Quantity Sold
TR
TC
Profit