What is the elasticity of demand at the monopoly quantity

Assignment Help Physics

Reference no: EM13989906

1 Monopoly profit maximization

Pfeitzer is a monopolist for a new drug that makes people feel thinner. It is producing its wonderdrug according to the following production function:

q = f(K,L) = 2K^1/4L^1/4

Input prices for labor L and capital K are w = 8 and r = 2, respectively. The optimal capital-labor ratio is hence K/L = 4 and labor as a function of output is L(q) = q²/8 and K(q) = q²/2. [This is just a reminder of how the cost function can be derived.] Total production cost as a functionof output is therefore c(q) = wL(q) + rK(q) = 2q². On top of that, the firm has incurred costs of 250 for research and development (which have already been paid, so it is a sunk cost) and pays an additional 2 per unit of output sold for advertising.1 The total cost function is thus

C(q) = 250 + 2q + 2q².

The incerse demand function is

p(q) = 66 - 2q.

(a) What is marginal cost and marginal revenue?

(b) What is the optimal price and quantity the monopolist should charge / sell?

2 Market Power

Consider the same firm as in the problem above, the Pfeitzer Corporation, for sub-questions (a) and (b) below.

(a) What is the elasticity of demand at the monopoly's quantity?

(b) What percentage of the price is due to costs and what is due to markup?

(c) [Remember: do not refer to the Pfeizer Corporation anymore] Figure 1 below shows the demand and cost curves facing a monopoly. If the firm is a profit maximizer, what will its Lerner index be?

3 Natural Monopoly

The average cost for a typical electric-power-production firm is AC = 100 - 10Q + Q2 where Q is measured in billion kilowatt hours per day. At the current regulated price, consumers demand 4 billion kilowatt hours per day. Is this market a natural monopoly? If demand increases to 10 billion kilowatt hours, is this market a natural monopoly? Explain.

4 Welfare Consequences

(a) Figure 2 below shows the demand and marginal cost curves for a monopoly. What is the deadweight loss (DWL) of this monopoly? What does this DWL represent?

(b) Can you identify the consumer surplus in Figure 2? Explain.

i. Consumers are willing to pay more for the last unit of output than it cost to produce.

ii. The cost of the last unit produced is more than consumers are willing to pay for it.

iii. The producer surplus is larger than in a competitive market.

iv. None of the above.

figure 1

Figure 1

Reference no: EM13989906

Questions Cloud

How would you interpret the dart rate for springs cola : For this assignment, you are going to interpret injury rates and DART rates for soft drink manufactures. How does the Springs Cola's injury rate compare to Waterford Cola's injury rate? How would you interpret the DART rate for Springs Cola

Tell us about yourself-new managerial job : “Tell us about yourself” is the ?rst query in your introductory meeting with the four people who will be reporting to you in your new managerial job. You naturally struggle with where to start. You have been a great individual contributor for four ye..

How would you define ethics in a business environment : How would you define ethics in a business environment? Explain how management can impact ethics within an organization. Please cite your sources. What can cause Organizational ethics to decline? Provide some examples.

Managing the multicultural workforce-managing globalization : Why are the themes of managing teams, managing the multicultural workforce, managing globalization, managing ethics and CSR, and managing with metrics so important today? Which of these challenges is likely to increase in importance in the next decad..

What is the elasticity of demand at the monopoly quantity : Consider the same firm as in the problem above, the Pfeitzer Corporation, for sub-questions (a) and (b) below. What is the elasticity of demand at the monopoly's quantity?

Organization to be strategic in managing human resources : Select an organization (a place that you currently work at or have knowledge with) and for this organization, please define how this organization incorporates a “partnership perspective for managing human resources.” Is it realistic to expect this or..

List the ingredient name and corresponding spf value : Describe the specific active ingredients which serve as the sunscreen agents. List the ingredient name and corresponding SPF value ?

Discuss the importance of organizational culture : Discuss the importance of organizational culture and the conditions in which organizational culture strength improves organizational performance

Discuss various service charachteristics for freight demand : The service characteristics of freight movement are considered by some shippers to be as important as or more important than the freight rate. Discuss the various service charachteristics for freight demand.

User Account

All Pages