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Chapter 10: Problem 1

Will an increase in the demand for a monopolist's product always result in a higher price? Explain. Will an increase in the supply facing a monopsonist buyer always result in a lower price? Explain.

Short Answer

Expert verified
In economics, increased demand could lead to higher prices in a monopoly, and increased supply could result in lower prices in a monopsony. However, price changes are not guaranteed in these market situations, and depend on various factors including market conditions, demand and supply elasticity, and the pricing strategy of the monopolist or monopsonist.

Step by step solution

01

Understanding Monopolist Price Effects

To analyze the first question, begin by defining a monopoly. In a monopoly, there is only one seller of a particular product. When demand for this product increases (meaning consumers are willing to buy more of it), the monopolist can respond accordingly. They can sell more product at the same price, thus increasing revenues, or they could raise the price, taking advantage of the increased demand. However, this doesn't mean the price will always go up when demand increases. It's a strategic decision made by the monopolist, depending on factors like production costs, potential for higher profits, and demand elasticity.
02

Understanding Monopsonist Price Effects

For the second question, it is necessary to first understand a monopsony. A monopsony exists when there is just one buyer in the market. If the supply (the amount of a product that producers are willing to sell) increases, there is more competition between suppliers to sell their products. This could lead the monopsonist, as the only buyer, to be able to negotiate lower prices. However, similar to the monopolist scenario, this don't mean the price will necessarily go down with increased supply. It also depends on other factors, such as the specific conditions of the market, the elasticity of supply, and the monopsonist's needs and strategies.
03

Consolidating Understanding

Having analyzed both scenarios, the conclusion is that while basic economic principles suggest that an increase in demand could lead to higher prices in a monopoly, and increased supply could result in lower prices in a monopsony, these outcomes are not guaranteed. Both the monopolist and the monopsonist have the ability to strategically choose their prices based on a variety of factors. Ultimately, the impacts of changes in demand and supply on price in these market structures are complex and depend on the specific circumstances and characteristics of each market.

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Most popular questions from this chapter

Suppose that an industry is characterized as follows: $$\begin{array}{|ll|} \hline C=100+2 q^{2} & \text { each firm's total cost function } \\ \hline M C=4 q & \text { firm's marginal cost function } \\ \hline P=90-2 Q & \text { industry demand curve } \\ \hline M R=90-4 Q & \text { industry marginal revenve curve } \\ \hline \end{array}$$ a. If there is only one firm in the industry, find the monopoly price, quantity, and level of profit. b. Find the price, quantity, and level of profit if the industry is competitive. c. Graphically illustrate the demand curve, marginal revenue curve, marginal cost curve, and average cost curve. Identify the difference between the profit level of the monopoly and the profit level of the competitive industry in two different ways. Verify that the two are numerically equivalent.

The employment of teaching assistants (TAs) by major universities can be characterized as a monopsony. Suppose the demand for TAs is \(W=30,000-125 n\) where \(W\) is the wage (as an annual salary) and \(n\) is the number of TAs hired. The supply of TAs is given by \(W\) \(=1000+75 n\) a. If the university takes advantage of its monopsonist position, how many TAs will it hire? What wage will it pay? b. If, instead, the university faced an infinite supply of TAs at the annual wage level of \(\$ 10,000,\) how many TAs would it hire?

1: } C_{1}\left(Q_{1}\right)=10 Q_{1}^{2} \\\ \text { Factory #2: } C_{2}\lef… # A firm has two factories, for which costs are given by: \\[ \begin{array}{l} \text { Factory #1: } C_{1}\left(Q_{1}\right)=10 Q_{1}^{2} \\ \text { Factory #2: } C_{2}\left(Q_{2}\right)=20 Q_{2}^{2} \end{array} \\] The firm faces the following demand curve: \\[ p=700-5 Q \\] where \(Q\) is total output-i.e., \(Q=Q_{1}+Q_{2}\) a. \(\mathrm{On}\) a diagram, draw the marginal cost curves for the two factories, the average and marginal revenue curves, and the total marginal cost curve (i.e., the marginal cost of producing \(Q=Q_{1}+Q_{2}\) ). Indicate the profit-maximizing output for each factory, total output, and price. b. Calculate the values of \(Q_{1^{\prime}} Q_{2^{\prime}} Q,\) and \(P\) that maximize profit c. Suppose that labor costs increase in Factory 1 but not in Factory \(2 .\) How should the firm adjust (i.e. raise, lower, or leave unchanged) the following: Output in Factory \(1 ?\) Output in Factory \(2 ?\) Total output? Price?

A monopolist firm faces a demand with constant elasticity of \(-2.0 .\) It has a constant marginal cost of \(\$ 20\) per unit and sets a price to maximize profit. If marginal cost should increase by 25 percent, would the price charged also rise by 25 percent?

Michelle's Monopoly Mutant Turtles (MMMT) has the exclusive right to sell Mutant Turtle t-shirts in the United States. The demand for these t-shirts is \(Q=10,000 / P^{2} .\) The firm's short-run cost is \(\mathrm{SRTC}=\) \(2000+5 Q,\) and its long-run cost is \(\mathrm{LRTC}=6 Q\) a. What price should MMMT charge to maximize profit in the short run? What quantity does it sell, and how much profit does it make? Would it be better off shutting down in the short run? b. What price should MMMT charge in the long run? What quantity does it sell and how much profit does it make? Would it be better off shutting down in the long run? c. Can we expect MMMT to have lower marginal cost in the short run than in the long run? Explain why.
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