Assignment: Monopolies
In this assignment, you will demonstrate your understanding of how supply and demand differ between monopolies and perfectly competitive markets and how these two markets determine the quantity supplied and market prices.
Also provide explanations of how the price effect and the quantity effect cause marginal revenue to be different from the price.
Finally, you will demonstrate your understanding of the impact of different government price regulations on monopolies.
Questions
1. The Gulf Sea Turtle Conservation Group (GSTCG), a non–profit group of volunteers working to collect data on nesting sea turtles and to promote sea turtle conservation, is considering creating a video to educate people about sea turtle conservation. The cost of duplicating a video on a DVD and mailing the DVD is $5.56. In a GSTCG member meeting, the video plan was discussed.
The first two columns of Table 1 below show the expected demand for the DVD at different suggested donation levels, and they can act as a single-price monopolist if they choose to. The receipts will be used to fund GSTCG supplies for their data collection and conservation work. At the end of each sea turtle nesting season, any excess funds are donated by the GSTCG to a local non-profit sea turtle research and rehabilitation facility.
a. Complete Table 1 by computing the total revenue, marginal revenue, total cost, and profit columns, each rounded to two decimal places. The marginal cost of duplicating a video on a DVD and mailing it is $5.56.
Table 1
Suggested Donation per DVD Request Anticipated Number of DVD Requests Total Revenue Marginal Revenue Total Cost at $5.56 per DVD Profit
$19.00 0 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
$15.00 2 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
$9.50 5 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
$7.75 9 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
$3.00 15 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
$0.00 24 (Enter your response here.) (Enter your response here.) (Enter your response here.) (Enter your response here.)
b. The president wants the GSTCG to provide videos to generate the most possible donations (total revenue). What price is the president of the GSTCG favoring, and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers.
(Enter your response here.)
c. The treasurer of the GSTCG wants the DVD program to be as efficient as possible so that the marginal revenue equals marginal cost. What price is the treasurer favoring, and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers.
(Enter your response here.)
d. The Fundraising Committee wants the DVD program to generate as much profit in donations as possible. What price is the Fundraising Committee favoring, and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answers.
(Enter your response here.)
2. Imagine an island a short distance off the east coast of a country. This island is called Onus, and it has a population of about 500 residents. Their only way to the mainland is by the ONE ferry boat that runs between Onus and the mainland (the ferry operates as a monopoly).
Similarly, a short distance off the west coast of the same country is another island, Yuri, with a similar population of about 500 residents. Yuri, however, is a tourist attraction. There are MANY ferry boats running between Yuri and the mainland (each ferry operating in this perfectly competitive market). Each Yuri ferry operator provides service to both the tourists and to the 500 west coast island residents.
Using the information you learned in Chapter 13 of the text, answer the following questions by comparing and contrasting the differences between the monopoly market in Onus and the perfectly competitive market in Yuri.
a. Using Figure 1a and Figure 2a, explain in detail what differences in demand that the monopoly ferry operator on the east coast island of Onus will experience compared to the demand that a single ferry operator will experience in the perfectly competitive west coast market of Yuri. Be sure to address the differences in the demand curves in the two different markets.
(Enter your response here.)
Figure 1a Figure 2a
b. Both the Onus ferry operator in the monopoly market and each Yuri ferry operator in the perfectly competitive market will want to produce at the point that the marginal revenue is equal to the marginal cost. Explain in detail how, due to the price effect and the quantity effect, the monopoly’s marginal revenue will always be less than its price while the marginal revenue in the perfectly competitive market will always be equal to the market price.
(Enter your response here.)
Figure 1b Figure 2b
c. Explain in detail how the monopoly ferry operator will determine the quantity of ferry service that she will provide to the 500 residents of Onus. Also, explain how that monopoly quantity will compare to the total quantity of ferry service available to the 500 residents of the perfectly competitive market of Yuri by ALL the Yuri ferry providers.
(Enter your response here.)
Figure 1c Figure 2c
d. Explain in detail how the monopoly ferry operator in Onus will determine the price she will charge the island residents for ferry service and how that price will differ from the price experienced by the island residents and tourists in the perfectly competitive market of Yuri.
(Enter your response here.)
Figure 1d Figure 2d
3. Onus residents, in questions 2.a.–d. above, complain to their local politicians about the high prices. In an attempt to reduce the exorbitant price that the residents must pay for ferry service to and from the mainland, the local politicians convince the legislature to create a regulatory board that will impose a legal price ceiling on the Onus monopoly ferry operator. Describe both the short-run and the long-run impacts of the three different price ceilings outlined below.
In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be below the ferry operator’s lowest ATC but well above its lowest AVC. What will be the short- and long-run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the island of Onus?
(Enter your response here.)
Figure 3a
b. In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be well above the ferry owner’s lowest AVC and equal to the ferry owner’s lowest ATC. What will be the short-run and long-run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the island of Onus?
(Enter your response here.)
Figure 3b
c. In this scenario, the regulatory board imposed a price ceiling on the Onus ferry operator that was calculated to be well above the ferry owner’s lowest AVC and well above the ferry owner’s lowest ATC. What will be the short-run and long-run impacts of such a price ceiling on the Onus monopoly ferry operator’s profits and continued ability to provide service to the inhabitants of the east coast island of Onus?
(Enter your response here.)
Figure 3c
