Quiz 12: Managerial Decisions for Firms With Market Power

Business

It is given that high unemployment rate because of recession created low turnover for toll bridges due to less vehicle utilization. (A) Certainly MTA has a high degree of market power. This is because MTA is planning to increase the price of toll even when the demand has fallen. This can happen only in case of monopolistic completion or monopoly when demand is inelastic. (B) If the marginal cost of letting another vehicle cross a bridge or travel through a tunnel is zero, the toll should charge price slightly higher than the average cost. It can even charge different prices according to the vehicle size and thus creating price differentiation. By price differentiation, MTA can earn major profits. (C) The optimal way would be hike price till it makes a profit. This is because the demand is inelastic and hiking prices will not affect the demand to a great extent.

It is given that Q. is a local cinema enjoying monopoly power. (A) Q. cinema enjoys high inelastic demand. Though it has monopoly power, high prices result in lower demand. The monopolist enjoys high revenues till the cost has not increased, and if the cost increases, low demand at high prices pose difficult problems to single price monopolist. (B) The market power of Q. cinemas can be measured by the elasticity of demand. If demand level does not decrease to a great extent by a price increase, then there is inelastic demand. (C) Instead of just increasing the price, the cinema could adopt a price differentiation strategy. It could charge different prices according to the demand.

The following is the information given about E. D. Star: a ) Table 1.1 shows the spreadsheet with the given inputs and cost structure: img b ) Write the formulae as follows: img Represent the values of Total Revenue ( TR ), Marginal Revenue ( MR ) and Marginal Cost ( MC ) of firm as follows: img Represent the table of the formulae excel sheet as follows: img The profit is maximized when img . In the given case, MR and MC do not equal each other at any point, the nearest they can reach is when img and img . After this point, MC starts exceeding MR. This maximization of output happens when img and img . c) The firm is making highest revenue when img . This is because monopolist does not work like competitive sellers. They charge differential prices to attain maximum profits. ( d ) Table 1.3 shows the total profit and profit margin: img Used Formulas to calculate values of table 1.2 as follows: img Calculation part: For example calculate total profit when quantity is 2000 and price is $1.25 as follows: img Similarly, remaining total profit values can be calculated. For example calculate profit margin when quantity is 2000 and price is $1.25 as follows: img Similarly, remaining profit margin values can be calculated. Therefore, the profit and profit margin are maximized at quantity 5000. ( e ) The total fixed is $2,000 for the firm. This is because when output is zero, total cost is $2,000. Represent the formulae excel sheet as follows; img Represent the table of the profit and profit margin when total fixed cost increases to 5,000 as follows: img Though the marginal cost and revenue intersect at img , the profit margin is negative for all quantities. - In short run, price is greater than average variable cost, so the firm should not shut down. Otherwise firm will incur losses equal to fixed cost, $5,000. - The fixed cost will spread over quantities in the long run, the profits will increase.

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