3. Profit maximization and loss minimization BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price-discriminate; tha it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average cost (AC), and demand (D) for beer in this market. Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectan (diamond symbols) to shade in the area representing its loss. 4.00 3.50 Monopoly Outcome 3.00 AC 2.50 Profit 2.00 PRICE (Dollars per can) 1.50 Loss MC 1.00 0.50 MR D 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 QUANTITY (Thousands of cans of beer) uppose that BYOB charges $2.75 per can. Your friend Manuel says that since BYOB is a monopoly with market power, it should charge a higher pr f $3.00 per can because this will increase BYOB's profit.Price Quantity Demanded Total Revenue Total Cost Profit (Dollars per can) (Cans) (Dollars) (Dollars) (Dollars) _ ~ [ ] ___~ [ _ >~ )~ [ Siven the earlier information, Manuel W correct in his assertion that BYOB should charge $3.00 per can. Suppose that a technological innovation decreases BYOB's costs so that it now faces the marginal cost (MC) and average cost (AC) given on the following graph. Specifically, the technological innovation causes a decrease in average fixed costs, thereby lowering the AC curve and moving the MC urve. blace the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing the loss. () 4.00 3.50 Monopoly Outcome 3.00 2.50 Profit 2.00 PRICE (Dollars per unit) AC 1.50 Loss 1.00 0.50 MC MR D 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 QUANTITY (Thousands of cans of beer)4. Monopoly versus perfect competition Consider the daily market for hot dogs in a small city. Suppose that this market is in long-run competitive equilibrium, with many hot dog stands in the city, each one selling the same kind of hot dogs. Therefore, each vendor is a price taker and possesses no market power. The following graph shows the demand (D) and supply (S = MC) curves in the market for hot dogs. Place the black point (plus symbol) on the graph to indicate the market price and quantity that will result from perfect competition. Perfect Competition 5.0 4.5 PC Outcome 4.0 3.5 3.0 2.5 PRICE (Dollars per hot dog) S = MC 2.0 1.5 1.0 0.5 D 0 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Hot dogs)Now suppose that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. @ Monopoly 50 -+ a0 | Monopoly Outcome 35 + 30 + 25 + 20 + 15 + PRICE (Dollars per hot dog) 1.0 + 0s | 0 40 80 120 160 200 240 280 320 360 400 QUANTITY (Hot dogs) In the following table, enter the price and quantity that would arise in a perfectly competitive market; then enter the profit-maximizing price and quantity that would be chosen if 8 monopolist controlled this market. Price Quantity Market Structure (Dollars) (Hot dogs) Perfect Competition E E 1 ] Monopoly Given the summary table of the two different market structures, you can infer that, in general, the price is higher under a W, and the quantity is higher under a b A This analysis assumes that the demand for hot dogs remains unchanged under both market structures. This need not be true because the monopoly may seek to: O shift the demand curve inward O 1Influence the demand curve through advertising m 6. Price-discriminating monopolist Shen owns a plot of land in the desert that isn't worth much. One day, a giant meteorite falls on his property, making a large crater. The event attracts scientists and tourists, and Shen decides to sell nontransferable admission tickets to the meteor crater to both types of visitors: scientists (Market A) and tourists (Market B). The following graphs show daily demand (D) curves and marginal revenue (MR) curves for the two markets. Shen's marginal cost of providing admission tickets is zero. Market A 20 18 16 14 12 10 PRICE (Dollars per ticket) MR 03 6 9 12 15 18 21 24 @ @ Market B 20 - 18 + 16 T 14 1 12 10 8 - . PRICE (Dollars per ticket) M':QP'LDJ"\\ et 0 3 6 9 12 15 18 21 24 27 30 Suppose that at first, Shen charges the same price of $8 per admission in both markets so that the total number of admissions demanded is E tickets. Suppose now that Shen decides to charge a different price in each market. To maximize revenue (and therefore, profits), Shen should charge per admission in Market A and per admission in Market B. At these prices, he will sell a total quantity OfE admission tickets per day. Complete the following table by calculating Shen's total revenue from selling in both markets under the nondiscriminatory as well as the discriminatory price policy. Total Revenue Pricing Policy (Dollars) Nondiscriminatory : Discriminatory : Shen charges a higher price in the market with a relatively W price elasticity of demand