Monopoly-answers

Monopoly-Answers

The Campus Store: most products competitive, textbooks oligopoly
Kinko's: monopolistic competition (differentiated service)
Pepperidge Farm's Whole Wheat Bread: competition or monopolistic competition (slightly differentiated recipes)
PowerMac computer and clones: monopoly due to licensing arrangements
Windows computer: monopolistic competition (differentiated features)
NYSEG (electricity utility): monopoly
Morton salt: competitive
AT&T long distance: oligopoly

For the monopolist shown in your handout, which of the following price and quantity combinations is optimal?
Price = $25, Quantity = 150
Price = $30, Quantity = 140
Price = $55, Quantity = 90
Price = $70, Quantity = 60
You can solve the problem from first principles: maximize profits.

The monopolist maximizes profits when marginal revenue equals marginal cost, just like a competitor.
For a monopolist, marginal revenue is not equal to the market price, because the monopolist is not a price-taker: larger quantities sold imply lower market prices.
Solution:
Price=$25, Quantity = 150, Profits = -$1,500
Price=$30, Quantity = 140, Profits = -$750
Price=$55, Quantity = 90, Profits = $950
Price=$70, Quantity = 60, Profits = $490

The data on your handout show the demand curves for movie tickets of adults and seniors. The market described has only one movie theatre.
- Find the best single price.
- If the movie theater can charge separate prices for adults and seniors, what are the best two prices?

Price Discrimination in the Movie Theatre Market
Price per ticket	Quantity adult movie tickets	Quantity senior movie tickets	Total Demand for Tickets	Single Price Total Revenue	Single Price Marginal Revenue	Adult Total Revenue	Adult Price Marginal Revenue	Senior Total Revenue	Senior Price Marginal Revenue	Marginal Cost	Single Price Economic Profits
12.00	200	0	200	2,400		2,400		0		1.00	2,200
11.50	225	25	250	2,875	9.00	2,588	7.00	288	11.00	1.00	2,625
11.00	250	50	300	3,300	8.00	2,750	6.00	550	10.00	1.00	3,000
10.50	275	75	350	3,675	7.00	2,888	5.00	788	9.00	1.00	3,325
10.00	300	100	400	4,000	6.00	3,000	4.00	1,000	8.00	1.00	3,600
9.50	325	125	450	4,275	5.00	3,088	3.00	1,188	7.00	1.00	3,825
9.00	350	150	500	4,500	4.00	3,150	2.00	1,350	6.00	1.00	4,000
8.50	375	175	550	4,675	3.00	3,188	1.00	1,488	5.00	1.00	4,125
8.00	400	200	600	4,800	2.00	3,200	0.00	1,600	4.00	1.00	4,200
7.50	425	225	650	4,875	1.00	3,188	-1.00	1,688	3.00	1.00	4,225
7.00	450	250	700	4,900	0.00	3,150	-2.00	1,750	2.00	1.00	4,200
6.50	475	275	750	4,875	-1.00	3,088	-3.00	1,788	1.00	1.00	4,125
6.00	500	300	800	4,800	-2.00	3,000	-4.00	1,800	0.00	1.00	4,000
5.50	525	325	850	4,675	-3.00	2,888	-5.00	1,788	-1.00	1.00	3,825
5.00	550	350	900	4,500	-4.00	2,750	-6.00	1,750	-2.00	1.00	3,600
4.50	575	375	950	4,275	-5.00	2,588	-7.00	1,688	-3.00	1.00	3,325
4.00	600	400	1,000	4,000	-6.00	2,400	-8.00	1,600	-4.00	1.00	3,000
3.50	625	425	1,050	3,675	-7.00	2,188	-9.00	1,488	-5.00	1.00	2,625
3.00	650	450	1,100	3,300	-8.00	1,950	-10.00	1,350	-6.00	1.00	2,200
2.50	675	475	1,150	2,875	-9.00	1,688	-11.00	1,188	-7.00	1.00	1,725
2.00	700	500	1,200	2,400		1,400		1,000		1.00	1,200

The best single price in this market is $7.50/ticket, which makes economic profits of $4,225 (blue entries). Set marginal cost = marginal revenue with the single price.
The price discriminating monopolist can make more economic profits by charging adults $8.50 (yellow entries) and seniors $6.50 (green entries). Set marginal cost = marginal revenue separately for each market.

Calculating economic profits separately for the two markets (adult and senior) shows that the total is greater than with the best single price.

Profit Maximum with 2 Prices
Economic profits adult market		2,813
Economic profits senior market		1,513
Total with price discrimination		4,325
Total without price discrimination		4,225

Last modified: May 25, 2000 01:54 PM (lecture-monopoly.html)

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