Page 677 - Krugmans Economics for AP Text Book_Neat

Section 11 Summary

c. Explain why the marginal revenue from an additional dia- a. Calculate the total revenue and the marginal revenue per
mond sale is less than the price of the diamond. album.
d.Suppose De Beers currently charges $200 for its diamonds. b.The marginal cost of producing each album is constant at
If it lowers the price to $100, how large is the price effect? $6. To maximize profit, what level of output should Down-
How large is the quantity effect? load Records choose, and which price should it charge for
e. Add the marginal cost curve to your diagram from part a, each album?
and determine which quantity maximizes the company’s c. Mary renegotiates her contract and now needs to be paid a
profit and which price De Beers will charge. higher royalty per album. So the marginal cost rises to be
constant at $14. To maximize profit, what level of output
15. Use the demand schedule for diamonds given in Problem 14.
should Download Records now choose, and which price
The marginal cost of producing diamonds is constant at $100.
should it charge for each album?
There is no fixed cost.
a. If De Beers charges the monopoly price, how large is 18. The accompanying diagram illustrates your local electricity
the individual consumer surplus that each buyer experi- company’s natural monopoly. The diagram shows the demand
ences? Calculate total consumer surplus by summing curve for kilowatt-hours (kWh) of electricity, the company’s
the individual consumer surpluses. How large is marginal revenue (MR) curve, its marginal cost (MC) curve, and
producer surplus? its average total cost (ATC) curve. The government wants to
regulate the monopolist by imposing a price ceiling.
Suppose that upstart Russian and Asian producers enter
the market and the market becomes perfectly competitive.
Price
b.What is the perfectly competitive price? What quantity will
of kWh
be sold in this perfectly competitive market?
$1.30
c. At the competitive price and quantity, how large is the con-
sumer surplus that each buyer experiences? How large is
total consumer surplus? How large is producer surplus?
0.80
d.Compare your answer to part c to your answer to part a.
How large is the deadweight loss associated with monopoly 0.50 ATC
in this case? 0.40
0.30 MC
16. Use the demand schedule for diamonds given in Problem 14. MR D
De Beers is a monopolist, but it can now price-discriminate
0 5 8 10 13
perfectly among all five of its potential customers. De Beers’s
Quantity of kWh (thousands)
marginal cost is constant at $100. There is no fixed cost.
a. If De Beers can price-discriminate perfectly, to which cus-
a. If the government does not regulate this monopolist, which
tomers will it sell diamonds and at what prices?
price will it charge? Illustrate the inefficiency this creates by
b.How large is each individual consumer surplus? How large shading the deadweight loss from monopoly.
is total consumer surplus? Calculate producer surplus by
b.If the government imposes a price ceiling equal to the mar-
summing the producer surplus generated by each sale.
ginal cost, $0.30, will the monopolist make a profit or lose
17. Download Records decides to release an album by the group money? Shade the area of profit (or loss) for the monopo-
Mary and the Little Lamb. It produces the album with no fixed list. If the government does impose this price ceiling, do you
cost, but the total cost of downloading an album to a CD and think the firm will continue to produce in the long run?
paying Mary her royalty is $6 per album. Download Records c. If the government imposes a price ceiling of $0.50, will the
can act as a single-price monopolist. Its marketing division monopolist make a profit, lose money, or break even?
finds that the demand schedule for the album is as shown in
the accompanying table. 19. The movie theater in Collegetown serves two kinds of cus-
tomers: students and professors. There are 900 students and
100 professors in Collegetown. Each student’s willingness to
Price of album Quantity of albums demanded pay for a movie ticket is $5. Each professor’s willingness to pay
$22 0 for a movie ticket is $10. Each will buy at most one ticket. The
movie theater’s marginal cost per ticket is constant at $3, and
20 1,000
there is no fixed cost.
18 2,000
a. Suppose the movie theater cannot price-discriminate and
16 3,000 needs to charge both students and professors the same
14 4,000 price per ticket. If the movie theater charges $5, who will
buy tickets and what will the movie theater’s profit be? How
12 5,000
large is consumer surplus?
10 6,000
8 7,000

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