04 Jun Question 1. Monopoly: Suppose you are given the f
Question
1. Monopoly: Suppose you are given the following information for Buzz Soda, a monopoly which is the sole producer of high quality, highly caffeinated soda. This monopolist seeks to maximize profits and uses the MR=MC RULE to find its profit maximizing (or loss minimizing) level of output. You must show all of your work where calculations are required and you must include a brief explanation of approximately 20-30 words for written answers to receive full credit:
Q (# cases demanded)
P (price per case) Total Revenue (TR) Marginal Revenue (MR) Total Cost (TC) Marginal Cost (MC)
0 $10.00 $0 — $0.50 —
1 $9.50 $7.50
2 $9.00 $14.00
3 $8.50 $20.25
4 $8.00 $26.75
5 $7.50 $33.50
6 $7.00 $40.50
7 $6.50 $48.00
8 $6.00 $57.00
9 $5.50 $68.00
10 $5.00 $81.00
a. (6 pts) Write down the formulas for, and then fill in the columns for TR, MR, and MC. Explain clearly at least one of each calculation needed for each column.
b. (2pts) What is the profit maximizing level of output (Q*) AND price (P*) for Buzz Soda? Explain your answer.
c. (2pts) Calculate the total economic profit that Buzz Soda would receive by producing at the profit maximizing output level and price. Show all calculations and explain your answer.
2. Herfindahl Index,
a. In the table below are data on five different industries and the market shares for each of the firms in the industry. In the column to the right of the table, calculate the Herfindahl index. Make sure you explain your calculations.
b. Which industry would be considered the most concentrated? Why?
Industry Market share of firms in industry
Herfindahl index
1 2 3 4 5 6
Aviation 25 20 15 15 15 10 _____
Textiles 25 25 25 15 10 — _____
Computers 60 10 10 10 10 — _____
Chemicals 20 20 20 20 20 — _____
Automotive 33 22 14 12 10 9 _____
3. Monopoly Graph: Consider the graph below of a monopoly firm. Answer the following questions based on the graph. Make sure you give a complete explanation of 20-30 words for each question and explain all calculations.
a. Which quantity, T, V, X or Y, is the profit maximizing quantity of output? Explain thoroughly.
b. What price, G, H, J or K, is the profit maximizing price? Explain thoroughly.
c. If this firm is producing the profit maximizing output and charging the profit maximizing price, are they making a positive profit, a loss, or zero profits? Explain clearly how you know from the graph.
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