Question
PRICE (Dollars per subscription) 10.4, 28 IT ATC MC 0 2 MRID 4 6 8 10...
PRICE (Dollars per subscription) 10.4, 28 IT ATC MC 0 2 MRID 4 6 8 10 12 14 16 QUANTITY (Thousands of subscriptions) 18 20
PRICE (Dollars per subscription) 6, 34 ATC MC + MRID 0 2 18 20 4 6 8 10 12 14 16 QUANTITY (Thousands of subscriptions)
6,50 PRICE (Dollars per subscription) ILL ATC MC MR 0 2 18 20 4 6 8 10 12 14 16 QUANTITY (Thousands of subscriptions)
PRICE (Dollars per subscription) 12, 20 ATC ATC 0 0 2 MR + LEH 4 6 8 10 12 14 16 QUANTITY (Thousands of subscriptions) 18 20
Suppose that the government has decided not to regulate this industry, and the firm is free to maximize profits, without constraints. Complete the first row of the following table. Short Run Quantity (Subscriptions) 6,000 Price (Dollars per subscription) Profit Long-Run Decision 50 Pricing Mechanism Profit Maximization Marginal-Cost Pricing Average-Cost Pricing Suppose that the government forces the monopolist to set the price equal to marginal cost. Complete the second row of the previous table. Suppose that the government forces the monopolist to set the price equal to average total cost. Complete the third row of the previous table. True or False: Under the average-cost pricing policy, the cable company has no incentive to cut costs. O True False
Answers
Profit maximization in monopoly situation
Monopolist is a price Maker. He will determine the quantity of output that will maximize revenue. The monopolist faces a downward sloping demand curve because he can sell more if he lowers the price. The profit maximizing price and output is where marginal revenue equals marginal cost, then it is extended to the market demand curve to determine what market price corresponds to that quantity.
The monopoly profit equals (P-ATC) x Q.
P=$50
ATC=$34
Q= where MR=MC=6,000
Profit =($50-$34) x 6000=$96,000.
Socially optimal outcome
The socially optimal quantity is at the intersection of MC and demand curve.
Q= MC=D= 12
Price at MC=D=$20
ATC is above $20, so there is a loss.
Fair return outcome
The fair return outcome is at the intersection of ATC and demand curve
Q= ATC=Demand curve= 10,400
Price at ATC=D=$28
ATC=$28
Profit=($28-$28)x 10,400=$0
Since P=ATC, the monopolist makes zero economic profit.
Short run
Pricing mechanism Quantity Price Profit Long run decision Subcriptions Dollars per subscription Profit Maximization 6000 50 Positive ( Price is above ATC) Continue in business Marginal Cost Pricing 12000 20 Negative ( Price is below ATC). Exit the industry Average Cost Pricing 10400 28 Zero Continue or exit Under the average cost pricing policy, the cable company has no incentive to cut costs. True.
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