6. A drug company has a monopoly on a new patented medicine.The product can be made in either of two plants. The total costsof production for the two plants (Plant 1 and Plant 2) are givenby:TC₁(Q₁) = 100TC₂(Q2) = 200where 2 and 22 are the level of output produced by Plant 1 andPlant 2, respectively.The firm's estimate of demand for the product is given byP=20-3(Q+22)where P is the unit price of the product.(a) Suppose that this company is not able to price discriminate.What are the profit maximizing level of output produced by Plant1 and Plant 2?(b) At what price will it sell the product?

Answered: 6. A drug company has a monopoly on a…

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter14: Monopoly

Section: Chapter Questions

Problem 14.5P

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How can a monopolist identify the profit-maximizing level of output if it knows its total revenue and total cost curves?
2. Consider a pharmaceutical company considering research and development of a new drug. They estimate that demand for this new, innovative product (the only of its kind) is given by p = 200-q, and the firm knows that once the drug is developed it can produce as much as it would like at a constant marginal cost of $10 (this implies a cost function of c(q) = 10q). (a) What is the monopolist's profit-maximizing price and quantity produced, pm and qm if they develop the drug? Be sure to include a well-labeled diagram! (b) If the firm expects that the R&D will cost $10,000, should the firm pursue this product innovation? (c) What is the most the firm should be willing and able to spend on this innovation? (d) What is the socially optimal quantity of output, q*? (e) What is the value of the innovation to society if it was competitively/efficiently supplied? (f) Calculate the deadweight welfare loss we should expect if the firm produces the new drug as a monopoly.
Suppose a monopoly market has a demand function in whichquantity demanded depends not only on market price (P) butalso on the amount of advertising the firm does (A, measuredin dollars). The specific form of this function isQ =(20 - P2) (1 + 0.1A - 0.01A2).The monopolistic firm’s cost function is given byC = 10Q + 15 + A.a. Suppose there is no advertising (A = 0). What outputwill the profit-maximizing firm choose? What market price will this yield? What will be the monopoly’sprofits?b. Now let the firm also choose its optimal level of advertising expenditure. In this situation, what output levelwill be chosen? What price will this yield? What will thelevel of advertising be? What are the firm’s profits in thiscase? Hint: This can be worked out most easily by assuming the monopoly chooses the profit-maximizing pricerather than quantity.
2. Acme Pharmaceutical Company discovers a vaccine that prevents the common cold and has a patent that grants it a monopoly on this drug. Acme has plants in both the North America and Europe and can manufacture the drug on either continent at a marginal cost of $10. Assume there are no fixed costs. In Europe, the demand for the drug is QE = 70 PE, where QE is the quantity demanded when the price in Europe is PE. In North America the demand for the drug is QN = 110 - PN, where QN is the quantity demanded when the price in North America is PN (a) Determine the aggregate demand function for the combined mar- ket. Determine the inverse demand function for the combined market and the inverse demand functions for each of the two mar- kets separately. (b) To begin, assume that it is illegal for the firm to price discriminate, so that it can charge only a single price P on both continents. What price will it charge, and what profits will it earn?
Market Power and Monopoly - End of Chapter Problem Green Machine is the only greenhouse in isolated Point Barrow, Alaska, and therefore has a monopoly on the sale of fresh flowers. The manager estimates that the elasticity of demand for flowers is -0.5. Green Machine cannot be maximizing profits because O it is operating in the inelastic portion of its demand curve, so it can increase price and still gain more revenue while lowering cost. This will increase profits. according to the Lerner index an elasticity of demand of -0.5 means Green Machine's markup is 50% higher than what it should be, so it needs to decrease price and increase sales. elasticity of demand is negative; therefore, Green Machine's total costs are higher than its total revenue, and profits are not being maximized. O its marginal revenue must be greater than its marginal cost when elasticity of demand is between 0 and -1, so profits are not being maximized and it must expand production to increase sales and lower…
The cost function for producing ethanol from municipal waste (wastehol) is 1000+10q2where q is in millions/gallons per year. The demand for wastehol is currently perfectly inelastic at 5 million gallons per year. Assume that producers of wastehol are perfectly competitive. California is deciding whether to convert all wastehol producers into a regulated wastehol utility. If wastehol is a regulated monopoly utility with the cost function above, what price would regulators set as the price of wastehol? Now assume that the wasteahol market has boomed and demand has grown to 20 (again million gallons per year). Now what is the regulated price of wastehol? You are the wastehol producer and are trying to decide whther to lobby for deregulating the wastehol industry. If wastehol were deregulated, if demand remains 20, what would the perfectly competitive price be? If you are a wastehol customer, you would prefer a deregulated industry if demand were 20? True/False?
A large share of the world supply of diamondscomes from Russia and South Africa. Suppose thatthe marginal cost of mining diamonds is constant at$1,000 per diamond and the demand for diamonds isdescribed by the following schedule:Price Quantity$8,000 5,000 diamonds7,000 6,0006,000 7,0005,000 8,0004,000 9,0003,000 10,0002,000 11,0001,000 12,000a. If there were many suppliers of diamonds, whatwould be the price and quantity?b. If there were only one supplier of diamonds, whatwould be the price and quantity?c. If Russia and South Africa formed a cartel, whatwould be the price and quantity? If the countriessplit the market evenly, what would be SouthAfrica’s production and profit? What wouldhappen to South Africa’s profit if it increased itsproduction by 1,000 while Russia stuck to thecartel agreement?d. Use your answers to part (c) to explain why cartelagreements are often not successful.
2. Suppose the home country open up to free trade and a foreign competitor enters the market. Assume thatthe foreign firm has the same cost structure as the home firm (the monopoly from the previous question). The demand for its product is given by the inverse demand function: P = 120 −QD. The company’s costs are: T C = 20Q+ 200 and MC = $20A) Derive the best response function for each firm (h-home and f-foreign)B) Find each firms’ output, the home market price, and each firms’ profit from the home market3. Now, suppose that in addition to the home country opening up to free trade, the foreign country has alsoopened up to free trade. As a result, both firms sell their product in both markets.A) Find each firms’ overall output, market price in each market, and each firms’ overall profitB) Explain what effect free trade has (relative to no trade) on the firms and consumers
4. A pharmaceutical firm is marketing a patented drug it has developed (the firm therefore has monopoly rights over the drug). The demand for the drug is given by Q = 8000 - 8P (MR(Q) = 1000 - ), where P is the price of the drug (in cents), and the total cost of production is TC(Q) = Q2+100Q+10000 (MC(Q) = 2Q + 100). a. Calculate the (monopoly) price of the drug, PM, and the quantity sold, QM b. Suppose now that the drug's patent expires, and other pharmaceutical firms can begin producing it. Assume this result in a competitive supply of the drug, and calculate the long-run competitive equilibrium price and aggregate quantity. Compare these to those you found in part a.
Assuming you are the managing director of a firm that produces three goods: A, Band C. The price elasticity of demand for A is 1.2, for B it is 1.00 and for C it is 0.75.It is known that he firm is experiencing serious cash flow problems and you have toincrease total revenue as soon as possible. If you were in a position to set the pricesfor these goods, what would be your pricing strategy for each product
Suppose that a firm is an imperfect competitor in the product market and a perfect competitor in the input markets and uses two variable inputs: Derive mathematically the first order condition showing how much of each input the firm should use se to maximize total profits Give a graphical interpretation of your answer to part (a). What characteristic of your figure indicates that the second order condition for maximization is satisfied? Indicate on your figure the level of "monopolistic exploitation".
Question 25 The change in total revenue that results from a one-unit increase in quantity sold is marginal revenue. By this definition, the marginal revenue of a monopolist is: O Always equal to price O Above price because the firmi is a price setter O Less than price because to sell more output the firm must reduce the price on all units sold O Less than price because a monopolist is a price taker

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