Chapter11 Mcguigan

Chapter 11

Price and Output Determination: Monopoly and Dominant Firms

Solutions to Exercises

1. a. Gross margins differ by subtracting direct fixed costs of manufacturing (e.g., machinery setup costs) as variable costs from wholesale revenue. b. Use the break-even sales change analysis CM%/CM% – %ΔP = .29/.19 = 1.53 = ΔQ + 1. Therefore, %ΔQ required to raise total contributions when price is cut by 10% is 53%. c. Three possibilities---capital costs, selling costs, overhead costs; probably higher promotion and advertising expense for a branded product like Whitman’s Sampler candy. In addition, the margins on Whitman’s candy must be higher because the inventory of candy turns much less frequently (perhaps 5 times per year) than the inventory of pantyhose (14 times per year). 2. a. The most important factor that needs to be considered is the price elasticity of demand. Given opportunities to conserve in both the long run and short run, it is possible that achieving a 16% rate of return is not feasible. b. If individuals are prohibited from drilling their own wells, the demand function would become relatively more inelastic. 3. a. MC = d(TC)/dQ = −5000 + 200Q b. P = MR = $20,000 c. MC = MR −5000 + 200Q = 20,000 200Q = 25,000 Q* = 125 d. π* = 20,000(125) − 800,000 + 5000(125) − 100(125)2 π* = $762,500

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Chapter 11/Price and Output Determination: Monopoly and Dominant Firms

4. a. AVC = Q2 − 10Q + 60 TVC = Q3 − 10Q2 + 60Q TC = Q3 − 10Q2 + 60Q + 1000 MC = 3Q2 − 20Q + 60 Q = 60 − .4P + 6(3) + 2(3) Q = 84 − .4P P = 210 − 2.5Q TR = PQ = 210Q − 2.5Q2 MR = 210 − 5Q MC = MR 3Q2 − 20Q + 60 = 210 − 5Q 3Q2 − 15Q −150 = 0 (3Q − 30)(Q + 5) = 0 Q* = 10 P* = 210 − 2.5(10) = $185 π = TR − TC π* = 185(10) − [(10)3 −10(10)2 + 60(10) + 1000] = $250

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b.

c....