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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
No, an increase in demand for a monopolist's product will not always result in a higher price. It depends on whether the monopolist chooses to increase the price or the quantity sold. Similarly, an increase in supply facing a monopsonist buyer will not always result in a lower price. It depends on the market dynamics including whether suppliers can differentiate their product or not.

Step by step solution

01

Analyze the Monopolist Situation

In a monopoly, one single firm controls the entire market. When demand for a monopolist's product increases, the monopolist can react in two ways: by increasing price to earn more profit per unit, or by increasing quantity. However, it will not always result in a higher price, especially if the monopolist chooses to increase the quantity sold rather than the selling price.
02

Analyze the Monopsonist Situation

In a monopsony, a single buyer controls the entire market. When there is an increase in supply, the monopsonist has greater bargaining power as it has more suppliers from whom to choose. However, an increase in supply does not always result in a lower price, particularly if the suppliers can differentiate their product based on quality or other non-price factors.

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Most popular questions from this chapter

A drug company has a monopoly on a new patented medicine. The product can be made in either of two plants. The costs of production for the two plants are \(\mathrm{MC}_{1}=20+2 Q_{1}\) and \(\mathrm{MC}_{2}=10+5 Q_{2}\). The firm's esti- mate of demand for the product is \(P=20-3\left(Q_{1}+Q_{2}\right)\) How much should the firm plan to produce in each plant? At what price should it plan to sell the product?

There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of \(Q=50-P\) Lake Wobegon Electric's (LWE) cost of producing electricity is \(\mathrm{TC}=500+\mathrm{Q}\) a. If the regulators of LWE want to make sure that there is no deadweight loss in this market, what price will they force LWE to charge? What will output be in that case? Calculate consumer surplus and LWE's profit with that price. b. If regulators want to ensure that LWE doesn't lose money, what is the lowest price they can impose? Calculate output, consumer surplus, and profit. Is there any deadweight loss? c. Kristina knows that deadweight loss is something that this small town can do without. She suggests that each household be required to pay a fixed amount just to receive any electricity at all, and then a per-unit charge for electricity. Then LWE can break even while charging the price calculated in part (a). What fixed amount would each household have to pay for Kristina's plan to work? Why can you be sure that no household will choose instead to refuse the payment and go without electricity?

Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of \(\$ 40\) per unit. a. If the elasticity of demand for the product is -2 find the marginal cost of the last unit produced. b. What is the firm's percentage markup of price over marginal cost? c. Suppose that the average cost of the last unit produced is \(\$ 15\) and the firm's fixed cost is \(\$ 2000\). Find the firm's profit.

In some cities, Uber has a monopoly on ride-sharing services. In one town, the demand curve on weekdays is given by the following equation: \(P=50-Q\) However, during weekend nights, or surge hours, the demand for rides increases dramatically and the new demand curve is: \(P=100-Q\). Assume that marginal \(\operatorname{cost}\) is zero. a. Determine the profit-maximizing price during weekdays and during surge hours. b. Determine the profit-maximizing price during weekdays and during surge hours if \(\mathrm{MC}=10\) in stead of zero. c. Draw a graph showing the demand, marginal revenue, and marginal cost curves during surge hours from part (b), indicating the profit-maximizing price and quantity. Determine Uber's profit and the deadweight loss during surge hours, and show them on the graph.

A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens, it makes economic sense to charge a monopoly price for electricity. True or false? Explain.
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