# 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]

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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