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- The Placebo Drug Company holds a patent on one of its discoveries. Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profit-maximizing price and quantity. Also show Placebo’s profits. (10 points) Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo’s new price and quantity. How does each compare to your answer in part (a)? (10 points) Although it might not be easy to see in your diagrams, the tax reduces Placebo’s profit. Explain why this must be true. (5 points) Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of £110,000 regardless of how many bottles are produced. How does this tax affect Placebo’s price, quantity and profits? Explain. (Hint: Additional unit produced won’t affect the tax amount). (10 points)Sg3 Economics An industry produces its product, Scruffs, at a constant marginal cost of $50. The market demand for Scruffs is equal to Q=75,000−500PQ What is the value to a monopolist who is able to develop a patented process for producing Scruffs at a cost of only $45? $_____________ If the industry producing Scruffs is purely competitive, what is the maximum benefit that an inventor of a process that will reduce the cost of producing Scruffs by $5 per unit can expect to receive by licensing her invention to the firms in the industry? $________________7. Monopoly and Price Elasticity Consider the relationship between monopoly pricing and the price elasticity of demand. If demand is inelastic and a monopolist raises its price, total revenue would and total cost would Therefore, a monopolist will produce a quantity at which the demand curve is inelastic. Use the purple segment (diamond symbols) to indicate the portion of the demand curve that is inelastic. (Hint: The answer is related to the marginal- revenue (MR) curve.) Then use the black point (plus symbol) to show the quantity and price that maximizes total revenue (TR). 10 Demand 9 8 Inelastic Demand 7 6 Max TR 3 2 1 -1 -2 Marginal Revenue -3 -4 -5 2 3 4 6 7 8 9 10 Quantity
- Questions: 1A) If MU Café, which is a monopolistically competitive firm, is making a positive profit in the short run, why might this profit become zero in the long run? 1B) If MU Café wants to keep the profit positive in the long run, what can it do? Provide ONE suggestion and briefly explain. 1C) What externality problem do you expect in the market for plastic bags? How does the government correct the inefficiency of the market? Explain in detail and diagram.1. Problems and Applications Q1 A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $2,000 per diamond, and the demand for diamonds is described by the following schedule: Price Quantity (Dollars) (Diamonds) 8,000 2,000 7,000 3,000 6,000 4,000 5,000 5,000 4,000 6,000 3,000 7,000 2,000 8,000 1,000 9,000 If there were many suppliers of diamonds, the price would be S per diamond and the quantity sold would be diamonds. diamonds. If there were only one supplier of diamonds, the price would be per diamond and the quantity sold would be Suppose Russia and South Africa form a cartel. diamonds. If the countries split the market In this case, the price would be S evenly, South Africa would produce per diamond and the total quantity sold would be diamonds and earn a profit of $ If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit…3. The Placebo Drug Company holds a patent on one of its discoveries. (a) Assuming that the production of the drug involves rising marginal cost, draw a diagram to illustrate Placebo’s profit-maximizing price and quantity. Also, show Placebo’s profits.(b) Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo’s new price and quantity. How does each compare to your answer in part (a)?(c) Although it is not easy to see in your diagrams, the tax reduces Placebo’s profit. Explain why this must be true.(d) Instead of the tax per bottle, suppose that the government imposes a tax on Placebo of ¿110 000 regardless of how many bottles are produced. How does this tax affect Placebo’s price, quantity, and profits? Explain.
- Quantity (in gallons) Total Price Revenue $8 $0 50 7 350 100 600 150 750 200 4 800 250 3 750 300 600 350 1 350 400 Imagine a small town in a remote area where only two residents, Maria and Miguel, own dairies that produce milk. Their respective dairies are equal in size. Each week Maria and Miguel work together to decide how many gallons of milk to produce and what price to charge. To keep things simple, suppose that Maria and Miguel can produce as much milk as they want without cost so that the marginal cost is zero and there are no fixed costs. The weekly town demand schedule and total revenue schedule for milk is shown in the table above. Suppose the town enacts new antitrust laws that prohibit Maria and Miguel from operating as a cartel. Assuming that each producer can only modify quantity in increments of 50, which of the following is consistent with the Nash equilibrium for this scenario? Maria will charge a price of $5 for each gallon. Miguel will sell 100 gallons. Milk will…4. Problems and Applications Q6 You live in a town with 300 adults and 200 children, and you are thinking about putting on a play to entertain your neighbors and make some money. A play has a fixed cost of $2,000, but selling an extra ticket has zero marginal cost. Here are the demand schedules for your two types of customers: Price (Dollars) 10 9 8 7 55 6 4 3 2 1 0 Adults (Tickets) 0 100 200 300 300 300 300 300 300 300 300 To maximize profit, you would charge $ Now you set a price of $ Children Children (Tickets) 0 0 0 0 100 200 200 200 200 200 The city council passes a law prohibiting you from charging different prices to different customers. You, the Producer for an adult's ticket and $ for all tickets, resulting in $ for a child's ticket. Total profit in this case would be $ in profit. Indicate whether each of the following groups of people is better off, worse off, or the same because of the law prohibiting price discrimination. Group of People Better Off Worse Off Unchanged…3. The Placebo Drug Company holds a patent on one of its discoveries. (a) Assuming that the production of the drug involves rising marginal cost, draw a dia- gram to illustrate Placebo's profit-maximizing price and quantity. Also show Placebo's profits. (b) Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo's new price and quantity. How does each compare to your answer in part (a)? (c) Although it is not easy to see in your diagrams, the tax reduces Placebo's profit. Explain why this must be true. (d) Instead of the tax per bottle, suppose that the gov- ernment imposes a tax on Placebo of €110 000 regard- less of how many bottles are produced. How does this tax affect Placebo's price, quantity and profits? Explain.
- 8. Provide an explanation to the following statements about monopolies. (a) The marginal revues decrease with q;. (b) The monopolist is a price maker. (c) The optimal price for the monopolist is greater than in perfect competition. (d) The optimal production level for the monopolist is lower than in perfect competition. (e) The resource allocation is inefficient. (f) When n E [1,2), there will be a natural monopoly.Suppose the fixed cost of the play were $1,800 rather than $1,000. Complete the following sentences indicating how this would change your answers to the previous parts. In the presence of price discrimination, the adult price of a ticket would and the child price would . Total profit would to $ If price discrimination were banned and the monopolist continued to produce the play no matter what the profit, the price of a ticket would , and total profit would toA monopolist is faced with the following cost and revenue curves:(picture) a.What is the maximum-profit price and output,total revenue, total cost and profit? b.If the monopolist were ordered to produce 300 units, what would be the market price and how much profit would now be made c.If the monopolist were faced with the same demand, but average costs were constant at £60 per unit, what output would maximise profit? What would be the price now?................................................................................................. (j) How much profit would now be made? ................................................................................... (k) Assume now that the monopolist decides not to maximise profits, but instead sets a price of £40. How much will now be sold? .................................................................................................................................................. (l) What is the marginal revenue at this…