Profit maximizing quantity and price

Assignments must be typed, with all calculations shown; diagrams can be hand drawn – – – insert your diagrams in the appropriate sections of your document.

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Question 1. The diagram below shows the demand, marginal revenue and cost curves for Jingyi who owns the only golf course in her community.

a. If Jingyi is a single-price monopolist, what is Jingyi’s the profit maximizing quantity and price? [2 marks]

b. What is the average total cost at the profit maximizing level of output? [2 marks]

c. What is Jingyi’s total weekly profit? [2 marks]

d. Calculate the deadweight loss to society. [2 marks]

e. If Jingyi was able to engage in Perfect price Discrimination, what price would she charge and how many rounds of gold would be sold each week? [2 marks]

f. What are the three conditions necessary for a firm to be able to price discriminate? [2 marks]

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Question 2. The table below contains demand and production data for a profit maximizing monopolist.

a. Calculate total revenue, marginal revenue, marginal cost and profit. [4 marks]

b. What is the profit maximizing level of output and associated price? [2 marks]

c. What profit will receive at the profit-maximizing level of output? [2 marks]

d. Briefly explain what a monopolist does not have a supply curve. [2 marks]

Quantity (Q) Price (P) Total Revenue Marginal Revenue Total Cost Marginal Cost Profit
0 $35 $0 $0  
100 32    

4,800  

 

200 29    

6,000  

 

300 26    

7,000  

 

400 23    

8,400  

 

500 20    

10,000  

 

600 17    

11,700  

 

700 14    

13,500  

 

Question 3. (Show all calculations)

Charlotte operates a yogurt stand in a perfectly competitive market on St. John’s waterfront during the summer months. The market price for a yogurt is $2. The table below shows her hourly production function. The hourly wage rate is $12.

a. Complete the table below. [2 marks]

b. How many hours of labour will Charlotte hire? [2 marks]

c. Suppose Charlotte purchases new machinery which doubles labour productivity as shown in the fifth column in the table below. How many hours of labour will Charlotte now hire? [2 marks]

Labour

(L)

Total Product (Q) Marginal Product of Labour Marginal Revenue Product Total Product (Q) Marginal Product of Labour Marginal Revenue Product
0 0     0    
1 9  

 

18

 

 

2 15  

 

30

 

 

3 19  

 

38

 

 

4 22  

 

44

 

 

5 24  

 

48

 

 

Question 4. Suppose Baak Culinary and La Cabrita are the only two firms operating in the late-night food market in Halifax. They can choose to cooperate and charge the same high price ($7) for their donairs or they can compete and charge a lower price ($4) – – – a lower price gains more market share. Below is the payoff matrix for this game.

a. Does either firm have a dominant strategy? Explain. [2 marks]

b. What is the best outcome if both firms collude? [2 marks]

c. Is there an incentive for either firm to cheat? Why? [2 marks]

d. In this game, what is the Nash equilibrium outcome? Explain. [2 marks]

  Baak Culinary

  Charges $7 for a donair Charges $4 for a donair
La Cabrita Charges $7 for a donair Profit: $3,000

Profit: $3,000

 

Profit: $5,000

Profit: $1,000

 

  Charges $ for a donair Profit: $1,000

Profit: $5,000

 

Profit: $1,500

Profit: $1,500

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