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1) Louie’s Fire Engines is the sole seller of fire engines in the fictional country of Pyrotania. Initially, Louie produces 150 fire engines, but Louie has decided to increase production from 150 to 200 fire engines. The following graph shows the demand curve he faces. As you can see, to sell the addional engines, Louie must lower his price from $50,000 to $40,000. Note that while Louie Gains revenue from one set of customers, he loses revenue from the initial customers by selling all engines at the lower price.
Use purple to shade the area representing this revenue lost (that is, from selling to the initial customers at $40,000 rather than $50,000).
Use green to shade the area representing revenue gained (that is, from selling to the additional customers at a price of $40,000).
*View Graph 1 to solve this question*
2) Suppose that Stelios Gaffney is the only seller of trekking poles in a small town. The following graph shows the demand and marginal revenue (MR) curves facing Stelios. *Graph 2 will help solve this problem (do not have to do anything with graph 2 besides get information from it). On Graph 3, use green to plot monthly total revenue at prices of $70, $60, $50, $40, $30, $20, and $10 per trekking pole. Then, consider the quantity of trekking poles at which Stelios Gaffney’s marginal revenue exactly equals zero. Place a grey point on the total revenue curve to indicate this quantity.
*View Graph 3*
If Stelios sells 6,000 pole at the highest price consumers are willing to pay according to the demand curve, his average revenue will be _____ per pole.
If a monopoly produces then it will:
a) Always operate on the elastic portion of its demand curve.
b) Always produce the maximum amount of out put possible.
c) Always operate on the inelastic portion of its demand curve.
d) Always produce where marginal revenue equals zero.
3) BYOB is a monopolist in beer production and distribution in a small country.
Suppose that BYOB cannot price discriminate. It sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) in the amrket for beer.
Place a grey point on the graph to indicate the profit maximizing price and quanity for BYOB.
If BYOB is making a profit, use the purple to shade in the area representing its profit. On the other hand, if BYOB is suffering an economic loss, use red to shade in the are representing its economic loss.
Suppose that BYOB charges $2.75 per can. Your friend Sondra says that since BYOB is a monopoly with market power, it should charge a higher price of $3.00 per can. Sondra claims that BYOB would break even if it did this. Fill in Table 1 to determine whether Sondra is correct.
(Options for fill ins: Box 1 under Quantity Demanded options are: 1,200; 2,000; 400; 1,600. Box two under Total Revenue: 7,000; 4,800; 4,400; 5,600. Box three under Total Cost: $7,000; $4,800; 5,600; 6,000. Box four under Profit: -500; -400; 0; -800; -1,000.)
Given the earlier information, Sondra ______ (is, is not) correct in her assertion that BYOB should charge $3.00 per can.
Suppose that a technological innovetion causes BYOB to now face the following marginal cost (MC), marginal revenue (MR), and average total cost (ATC), and demand (D) in the market for beer. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the ATC curve to its position on the following graph.
Place a grey point on the following graph to indicate the profit-maximizing price and quantity for BYOB.
If BYOB is making profit, use purple to shade in the area that represents profit. However, if BYOB is suffering an economic loss, use red to shade the area that represents economic losee
*Graph 5 will be provided once a tutor is chosen*
4) Price discrimination is the practice of selling the same good at more than one price when the price differences are not justified by cost differences.
Evaluate the following statement: “Price discrimination requires market segregation.”
a) Tue, because the monopolist needs to know the willingness to pay of different groups of consumers
b) None of these choices.
c) False, because the monopolist can never charge anyone their maximum willingness to pay anyway
d) False, because the monopolist does not need to know people’s willingness to pay for its good
6) Albert and Amy are debating the use of coupons by grocery stores. Albert says, “The use of coupons in grocery stores represents a means of price discrimination. It’s pure and simple. Coupons do reduce the price of groceries, but mostly to people who are less likely to buy at the full price.” By contrast, Amy contends, “Coupons do not constitute price discrimination. They simply represent a way of temporarily charging the prices of some grocery items. Coupons reduce the price for everyone, not just for those who are price sensitive.”
Economists generally agree with ________ (Albert, Amy).
6) Brian, a retiree, owns and lives in the deser on a piece of land that isn’t worth much. One day, a giant meteor falls in the middle of his property. As it turns out, two groups of people are interested in visiting the meteor: scientists (Market A) and tourists (Market B). Brian decides to sell tickets to visit the meteor in both Market A and Market B. He stays home all day anyways, so collecting money from visitors isn’t a problem for him. Therefore, you can assume he has zero costs. Also, Brian has a very good memory and will allow only the person who bought each ticket to use it. Thus, you can assume that all tickets are nontransferable.
The demand and marginal revenue curves for the two markets are shown in Graph 6.
*Graph 6 will be provided once a tutor is chosen*
Suppose Brian has to charge the same ticket price in each of the two markets. If he sets a price of $8 per ticket, the total quantity demanded will be _____ (16, 4, 12, 8) ticket per hour.
Now, suppose Brian can price discriminate by charging a different price in each market. Because Brian has no costs, he chooses prices for scientists and tourists that maximize his total revenue. In order to maximize revenue, Brian should charge _______ ($8, $10, $6, $12) per ticket in Market A and _______($8, $6, $10, $4) per ticket in Market B. At these prices, he will sell a total quantity of _______ (4, 16,12, 8) tickets per hour.
Refer to your answers to the previous two questions. Suppose Brian decides that he wants to limit admission to 16 people per hour, but he still wants to generate the most revenue possible. If Brian is forced to charge everyone the same price, he will earn revenues of _______ ($256, $136, $128, $64) per hour.
Brian charges a higher price int he market with _______ ( higher, lower) price elasticity of demand.
7) Consider the market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium with many hot dog stands in the city, each one selling the same kind of hot dog. Therefore, each vendor is a price taker and possesses no market power.
Graph 7 shows the demand (D) and supply curves (S=MC) in the market for hot dogs.
Determine the size of consumer surplus (CS) and producer surplus (PS) in this perfectly competitive market. Place a red point on the graph to indicate the market price and a quantity that will result from perfect competition (PC). Dashed drop lines will automatically extend to both axes. Use green to shade the area that represents consumer surplus, and use purple to shade the area that represents producer surplus.
Note: Throughout this problem, if you decide that consumer surplus or producer surplus equals zero, you should NOT place the shade corresponding to that area on the graph
*Graph 7 will be provided once a tutor is chosen.*
Now, assume that one of the hot dog stands successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog stands in the city and operates as a monopoly. Assume that this change doesn’t affect demand and that new monopoly’s marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and the marginal costs (MC) curves for the monopoly firm.
Place a red point on the following graph to indicate the profit-maximizing price and quanity of a monopolist. Use green to shade the area that represents consumer surplus, and use purple to shade the area that represents produce surplus.
*Graph 8 will be provided once a tutor is chosen*
Consider the welfare effects when the industry operates under a perfectly competitive market vs. a monopoly. On Graph 8 use tan to shade the area that represents the loss of welfare from a monopoly, or a dead weight loss (DWL). That is, show the area that was formerly producer surplus or consumer surplus and now does not accrue to anybody.
In the following table, enter the price and quantity that would arise in a perfectly competitive market; then enter the profit-maximizing price and quantity that would be chosen if a monopolist controlled this market.
*Table 2 will be provided once a tutor is chosen*
Table 2 fill in options
Under Price/Perfect competition: $4.00, $1.50, $3.50, $1.00, $2.50, $3.00, $2.00
Under Quantity/Perfect competition: 150, 400, 300, 305, 250, 100, 200
Under Price/Monopoly: $3.00, $2.50, $2.00, $3.50, $4.00, $1.50, $1.00
Under Quantity/Monopoly: 150, 300, 100, 350, 200, 250, 400