1. Chapter 9 Questions & Solutions

2. 1
Plot the marginal revenue curve associated with the following demand curve faced by a monopolistic competitor. P Q D

3. 1 P
MR D 40 Q

4. 2 Use the graph on the next slide to answer the following questions.
A. What price is charged by the monopolistic in order to maximize profits?
B. Calculate the total revenue accruing to the monopolist at the profit maximizing output.
C. Calculate the total cost to the monopolist at the profit-maximizing output.
D. Calculate the profit for the monopolist.
E. Calculate the total variable and fixed costs of the monopolist at the profit-maximizing output.
F. Now assume the MC curve represents market supply for a perfectly competitive market. What would the equilibrium price and quantity be for perfect competition? Are consumers better off or worse off with perfect competition or monopoly?

5. 2 P MC
ATC
AVC D MR Q
Cont. 20 13 16 15 12

6. 2 (a) MR = MC Q = 20; P = $20 (b) TR = PQ = $400 (c) ATC when Q = 20
TC = (ATC)(Q) = ($25)(20) = $300
(d) Profit = TR - TC = $400 - $300 = $100
(e) AVC when Q = 20
AVC = $12
TVC = (AVC)(Q) = ($12)(20) = $240
TFC = TC - TVC = $300 - $240 = $60
(f) P = $16 Q = 28
Consumer better off with Perfect Competition
Lower Price, more quantity

7. 3
List differences and similarities among monopolies, oligopolies, and monopolistic competition. Be prepared to give examples of each form of imperfect competition on the selling side.

8. 3
See Notes

9. 4 A. Calculate the total input cost and the marginal input cost.
Units of Total Cost of Marginal Input
Variable Input Price/Unit Input Cost
A. Calculate the total input cost and the marginal input cost.
B. If the marginal value or marginal revenue products were 4, what would be the profit maximizing level of input?

10. 4 Rule MVP (or MRP) = MIC 4 = MIC
Units of Total Cost of Marginal Input
Variable Input Price/Unit Input Cost $
$ $3
$ $4
$ $6.75
$ $8.5
Rule MVP (or MRP) = MIC
4 = MIC
Profit maximizing level of input is 3 units

11. Quantity per unit of time
A. Find the equilibrium price and quantity for a monopsonist in the graph below.
B. Find the equilibrium price and quantity under perfect competition in the graph below.
C. What is the magnitude of monopsonistic exploitation? 5
MIC
Quantity per unit of time 8 5 3
$/unit
Supply of Input
MVP or MRP

12. 5 (a) MIC = MVP Under monopsony 10 units of input @ $3/unit
(b) Under perfect competition
15 units of $5/unit
(c) Magnitude of monopsonistic exploitation
Difference in price of input under perfect
competition versus monopoly
$5 - $3 = $2

13. 6 Explain the significance of the following acts: A. Clayton Act
B. Capper-Volstead Act
C. Packers and Stockyards Act

14. 6
See Notes

15. 7
List and explain the various measures that may be employed to counteract possible adverse effects of imperfect competition in the marketplace.

16. 7
See Notes

17. 8
On the following graph, show the effect of a lump-sum tax on a monopolist.
Quantity per unit of time MC
ATC
MR D
$/unit

18. 8 Upward shift of ATC Curve
No effect on price charged by the monopolist
No effect on quantity produced by the monopolist
But a reduction in profit occurs

19. 9 Using the graph below, answer questions a through d.MC D 50 40 38 35
25 MR Q P
ATC
A. What are the profit-maximizing price and quantity levels for the monopolist?
B. Calculate profit.
C. Suppose the government imposes a price ceiling of $40. Now what is the optimal price and quantity combination?
D. Calculate the new level of profit.

20. 9 (a) MR = MC P = $50 Q = 25 (b) TR = PQ = ($50)(25) = $1250
ATC when Q = 25
TC = ATC)(Q) = ($38)(25) = $950
Profit = TR - TC = $300
(c ) MR = MC
P = $40 Q = 34
(d) TR = PQ = ($40)(34) = $1360
ATC when Q = 34
ATC still $38
TC = (ATC)(Q) = ($38)(34) = $1292
Profit = TR - TC = $1360-$1292=$68