I I nun... nun. LI n..- [-11 l\\..\\._. 2 A small town is served by many competing supermarkets which have constant marginal cost a b Using a diagram ofthe market for groceries, show the consumer surplus, producer surplus and total surplus. Now suppose that the independent supermarkets combine to form one chain. Using a new diagram, show the new consumer surplus, producer surplus and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss? 6 You live in a town with 300 adults and 200 children, and you are thinking about putting on a playto entertain your neighbours and make some money. A play has a fixed cost of $2000, but selling an extra ticket has zero marginal cost. Here are the demand schedules for your two types of customer: Price Adults Children $10 0 O 9 100 0 8 200 0 7 300 0 6 300 O 5 300 100 4 300 200 3 300 200 2 300 200 1 300 200 O 300 200 a To maximise profit, what price would you charge for an adult ticket? For a child's ticket? How much profit do you make? b The city council passes a law prohibiting you from charging different prices to different customers. What price do you set for a ticket now? How much profit do you make? c Who is worse off because of the law prohibiting price discrimination? Who is better off? (Ifyou can, quantify the changes in welfare.) d lfthe fixed cost ofthe play were $2500 rather than $2000, how would your answers to parts (a), (b) and (c) change? 10 Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new 4K Blu-ray: Demand: P = 1000 1 00 Total revenue: TR: 1000C) 10C)2 Marginal revenue: MR = 1000 200 Marginal cost: MC: 100 +100 where Q indicates the number of copies sold and P is the price in Ectenian dollars. a Find the price and quantity that maximise the company's prot. b Find the price and quantity that would maximise social welfare. c Calculate the deadweight loss from monopoly. d Suppose, in addition to the costs above, the director of the film has to be paid. The company is considering four options: i a at fee of 2000 Ectenian dollars. ii 50 per cent of the prots. iii 150 Ectenian dollars per unit sold. iv 50 percent ofthe revenue. For each option, calculate the profit-maximising price and quantity. Which, ifany, of these compensation schemes would alter the deadweight loss from monopoly? Explain. 4 For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither: a faces a downward-sloping demand curve b has marginal revenue less than price c faces the entry of new firms selling similar products d earns economic profit in the long run e equates marginal revenue and marginal cost f produces the socially efficient quantity of output.7 Consider a monopolistically competitive market with N rms. Each rm's business opportunities are described by the following equations: Demand: Q = TOO/N P Marginal revenue: MR=100/N ZQ Total cost: TC: 50 + 02 Marginal cost: MC: 20 a How does N, the number offirms in the market, affect each firm's demand curve? Why? b How many units does each firm produce? (The answers to this and the next two questions depend on N.) c What price does each firm charge? d How much profit does each rm make? e In the long run, how many rms will exist in this market? 8 The market for peanut butter in Nutville is monopoiistically competitive and in long-run equilibrium. One day, consumer advocate Skippyjif discovers that all brands of peanut butter in Nutville are identical. Thereafter, the market becomes perfectly competitive and again reaches its longrun equilibrium. Using an appropriate diagram, explain whether each ofthe following variables increases, decreases or stays the same for a typical rm in the market: a price b quantity c average total cost d marginal cost e profit