Market Structures and Pricing Decisions Applied Problems
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Market Structures and Pricing Decisions Applied Problems
Question #1: A small business which produces plastic vacuum-suction covers for round household dishes has a monopoly that is protected by a utility patent. The market demand curve for this product is estimated to be:
Q = 6009 – 25P where Q is the number of plate covers per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 120 + 2500Q -0.25*Q2.
P (price)
Q (output)
MC (marginal cost)
D (demand)
MR (marginal revenue)
MR=MC
Q=6009 – 25P
P= (6009-Q)/25 = 240.36 - 0.04Q
P(Q)= 6009/25 – Q/25
TR=P*Q = Q*(240.36 - 0.04Q) = 240.36Q - 0.04Q2
TR=P(Q)*Q=Q*6009/25-Q^2/25
MR=dTR/dQ = 240.36 - 0.08Q
MR=6009/25 -2*Q/25
TC=120+2500*Q-0.25*Q^2
MC= 2500-2*Q*0.25
6009/25 -2*Q/25=2500-2*Q*0.25
Q =5381, and P =$25.12
Profit is negative. Marginal cost is greater than marginal revenue. There is a first year fixed cost of 120. Monopoly has no effect in following years unless positive output is produced.
Question #2: Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC’s price for the typical lawn system was $1,995 compared with BLG’s price of $2,100. GGC installed 9,130 systems, or about 55% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners since the parts are readily available at hardware stores.) GGC has substantial excess capacity—it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both...