ECF2731 MANAGERIAL ECONOMICS Question 1: Monopoly (24 Marks) You have been hired by First Response Pty Ltd, a major supplier of fire protection equipment to provide them with advice on pricing, production and profit maximization. The company has recently introduced a new line of fire extinguishers that enjoy patent protection. The company CEO has provided the following limited data to assist with you: Table 1: Output and Cost profile for First Response Pty Ltd Q 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 Total Fixed Cost $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 $8,500,000 Total Variable Cost $500,000 $740,000 $1,060,000 The total variable cost function for the new line of extinguishers is given by the following functional form: $500,000 + (x)Q + (y)Q2 The demand for the new line of extinguishers is given by the following function: P = $300-0.001Q (a) Using Table 1, the functional form for total variable costs and simultaneous equations, and the demand function provided - calculate total variable cost, total cost, total revenue, total profit, marginal revenue, average cost, marginal cost, and marginal profit for each level of output (Q) an illustrate your answers in a table. (10 marks) (b) Show how the profit maximizing output, price and profit for this firm can be calculated using marginal analysis and show workings. (4 marks) (c) Calculate the optimal profit margin for this firm and show workings. (1 mark) (d) What would the competitive price and competitive output level be in this market? Show workings. (3 marks) (e) Calculate the deadweight loss for the consumer and the producer and the amount of surplus transferred from the consumer to the producer and show workings. (4 marks) (f) Calculate the net gain for the producer by being a monopolist as compared to the competitive market outcome and show workings (2 marks) Question 2: Monopolistic Competition (16 Marks) Consider the following graph, (graph 1) for the short run equilibrium for a monopolistically competitive firm producing air-conditioning units for commercial operations. Graph1 $ Price per unit P1 ATC MC P2 D3 P3 D2 Q2Q1 Q3 D1 Quantity MR2MR1 The following information is given: D1 = $31,000- $17.7Q TC = $650,000 + $5,000Q + $12.5Q2 Answer the following and referring to the relevant elements of graph 1 above and show all workings. (a) Calculate price output and profit for the short run equilibrium. (4 marks) (b) Calculate price, output and profit for the long run equilibrium (with and without product differentiation). (8 marks) (c) Is the market allocatively efficient in the short run or long run (why or why not?). (2 marks) (d) Is the market productively efficient in the short run or long run (why or why not?). (2 marks)
