396 PART • Market Structure and Competitive Strategy EXERCISES 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 Caterpillar Tractor, one of the largest producers of farm machinery in the world, has hired you to advise it on pricing policy One of the things the company would like to know is how much a 5-percent increase in price is likely to reduce sales What would you need to know to help the company with this problem? Explain why these facts are important A monopolist firm faces a demand with constant elasticity of Ϫ2.0 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? A firm faces the following average revenue (demand) curve: P = 120 - 0.02Q where Q is weekly production and P is price, measured in cents per unit The firm’s cost function is given by C ϭ 60Q ϩ 25,000 Assume that the firm maximizes profits a What is the level of production, price, and total profit per week? b If the government decides to levy a tax of 14 cents per unit on this product, what will be the new level of production, price, and profit? The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10: d What would the social gain be if this monopolist were forced to produce and price at the competitive equilibrium? Who would gain and lose as a result? Suppose that an industry is characterized as follows: C ϭ 100 ϩ 2q2 each firm’s total cost function MC ϭ 4q firm’s marginal cost function P ϭ 90 − 2Q industry demand curve MR ϭ 90 − 4Q industry marginal revenue curve 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 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 A firm has two factories, for which costs are given by: PRICE QUANTITY Factory # 1: C1 (Q1) = 10Q21 18 Factory # 2: C2 (Q2) = 20Q22 16 14 12 12 10 16 20 24 28 32 36 a Calculate the firm’s marginal revenue curve b What are the firm’s profit-maximizing output and price? What is its profit? c What would the equilibrium price and quantity be in a competitive industry? The firm faces the following demand curve: P = 700 - 5Q where Q is total output—i.e., Q ϭ Q1 ϩ Q2 a 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 ϭ Q1 ϩ Q2) Indicate the profit-maximizing output for each factory, total output, and price b Calculate the values of Q1, Q2, Q, and P that maximize profit c Suppose that labor costs increase in Factory but not in Factory 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?