Answers to Back-of-the-Chapter Problems
1. a. The merger should mean the end of the prevailing cutthroat competition. The
b. Formerly, cutting rates made sense in order to claim additional clients from
2. If the company is currently charging the optimal monopoly price, any cut will
reduce its profit – the larger the price cut, the larger the profit reduction. Here
Suppose the company lowers price to P = $.16 and the elasticity of
demand turns out to be EP = -1.5. Then dQ/Q = (-1.5)(-20%) = 30%, so Q =
3. Packing the product space with a proliferation of differentiated items is a
4. a. A profit-maximizing cartel sets MR = MC. Thus, 500 – (2/3)Q = 200, or QM
5. a. We know that P = 11 – Q and C = 16 + Q. Setting MR = MC, we have
b. The regulator sets P = AC. Thus, 11 – Q = 16/Q + 1. After multiplying both
c. Under marginal-cost pricing, P* = MC = $1 and Q = 11 – P = 10 million. At
6. a. The monopolist sets MR = MC, implying 1,500 – .2Q = 300 + .1Q, or QM =
7. a. OPEC maximizes its profit by setting MR = MC. We have 165 – 5Q = 15.
b. If OPEC sets P = $65, it sells: Q = 66 – (.4)(65) = 40 million barrels per day.
Profit (per day) is: π = (65 – 15)(40) = $2.0 billion. Instead, if it sets P1 = $90
for the first five years, its initial profit is: π1 = (90 – 15)(30) = $2.25 billion
8. a. We have P = 35 – 5Q and MC = AC = 5. Setting MR = MC, we find QM = 3
b. The monopolist’s profit is: πM = (20 – 5)(3) = $45 million. Consumer surplus
9. a. At P = $15, 2.5 million trips are demanded. In the text, we saw that each
fully utilized taxi had an average cost per trip of $10 and, therefore, earned an
b. The rearranged demand curve is P = 20 – 2Q. We saw that the extra cost of
adding a fully occupied taxi is $1,400 per week, or $10 per trip. The relevant
c. If the market could be transformed into a perfectly competitive one, the result
d. Taxi trips are not perfect substitutes. If a taxi charges a fare slightly higher
than the industry norm, it will not lose all its sales. (Customers in need of a
taxi will take the one in hand, rather than wait for a slightly cheaper fare.)
Since there is room for product differentiation and price differences, the taxi
10. a. To produce a fixed amount of output (in this case, 18 units) at minimum total
cost, the firms should set outputs such that MCA = MCB. This implies 6 + 2QA
b. We know that P = 86 – Q, implying MR = 86 – 2Q. Marginal revenue at Q =
c. Setting MR = MCA = MCB implies 86 – 2(QA + QB) = 6 + 2QA = 18 + QB. The
11. a. The bookstore’s profit is: = (P – AC)Q = (9 – 5)(12) = $48 thousand.
b. From the demand curve, the chain sells 6 thousand books online at P = $12
and 10 thousand books in its stores at P = $7. Therefore, its total profit is (12
– 4)(6) + (7 – 5)(10) = $68 thousand. Consumer surplus is the sum of
Price
P = 15 – .5Q
6 12 16 Quantity
1
5
1
2
9
7
0
B
A
*12. a. We know that P = 660 – 16Q1 and C = 900 + 60Q1 + 9Q12. Setting MR =
b. If 10 firms each produce 6 units, total output is 60 and the market price is
indeed P = 1,224 – (16)(60) = $264. Setting firm 1’s MR = MC yields 1,224 –
c. Under perfect competition, Pc = ACMIN. Setting AC = MC, we have: 900/QF +
60 + 9QF = 60 + 18QF, implying QF = 10 and ACmin = 240. Thus, Pc = $240
Discussion Question
Under patent, the pharmaceutical company has a monopoly on the drug in
question. The firm must still gauge overall demand in order to determine the
profit-maximizing monopoly price. Upon the expiration of the patent, there is
More likely, the former monopoly producer will have established some degree
of brand allegiance for its drug. Because of new competition, it will be forced to
Figure 8.3 can be used to highlight the different pricing implications of pure
monopoly and perfect competition. (However, Figure 8.3 depicts constant returns
Spreadsheet Problems
S1. a. and b. Using the spreadsheet optimizer, we find the monopolist’s optimal
c. To maximize the monopolist’s long-run profit, we include the number of
S2. Use the spreadsheet created for Problem S2 of Chapter Seven. The
S3. a. and b. Using the spreadsheet optimizer, we determine the short-run
equilibrium under monopolistic competition as follows: Set the value of
c. To find the long-run equilibrium, set the value of MR – MC in target