ECN360 homework

Consider a market for online move rentals. The market supply curve slopes upward, the market
demand curve slopes downward, and the equilibrium rental price equals $3.50. Consider each of the following
events, and discuss the effects they will have on the market clearing price and on the demand curve faced by
the individual online rental firm. (see page 509)
a. People’s tastes change in favor going to see more movies at cinemas with their friends and family members.
b. More online movie-rental firms enter the market.
c. There is significant increase in the price to consumers of purchasing movies online.
a.

The demand for online movies decreases, thus the demand curve slopes
downward which in turn will decrease the market clearing price.

b.

The market becomes perfectively competive because the firms are offering the same online movies as other firms and the buyers and sellers are so numerous that no single buyer or seller has any influence over the market price.

c.

Since the price of online movies went up, consumers will purchase less.
This is law of demand. The demand curve will slope downward.

Yesterday, a perfectly competitive producer of construction bricks manufactured and sold 10,000
bricks per week at a market price that was just equal to the minimum average variable cost of producing each brick. Today, all firm’s costs are the same, but the market price of bricks has declined. (see pages 514-515).
a. Assuming that this firm has positive fixed costs, did the firm earn economic profits, economic losses, or zero economic profits yesterday?

b. To maximize economic profits today, how many bricks should this firm produce today?

The minimum feasible long-run average cost for firms in a perfectly competitive industry is $40
per unit. If every firm in the industry currently is producing an output consistent with a long-run
equilibrium, what is the marginal cost incurred by each firm? What is the market price? (see page 524)

A manager of a monopoly firm notices that the firm is producing output at a rate
at which average total cost is falling but is not at its minimum feasible point.
The manager argues that surely the firm must not be maximing its economic profits.
Is this argument correct? (see pages 540-541).

Yes, his argument is correct because the profit maximizing rule in a monopoly is Marginal Revenue=Marginal Costs (MR=MC).
If the price or the output falls below the Average Total Cost (ATC) then the firm is operating at a loss.

The marginal revenue curve of a monopoly crosses its marginal cost curve at
$30 per unit and an output at 2 million units. The price that consumers are willing
to pay for this output is $40 per unit. If it produces this output, the firm’s average
total cost is $43 per unit, and its average fixed cost is $8 per unit.
What is the profitmaximizing (loss-minimizing) output? What are the
firm’s economic profits (or economic losses)? (see page 541-544).

For each of the following examples, explain how and why a monopoly would try to price discriminate. (see pages 545-546).
a. Air transport for businesspeople and tourists
b. Serving food on weekdays to businesspeople and retired people.
Hint: Which group has more flexibility during weekday to adjust to a
price change and, hence, a higher price elasticity of demand?

A new competitor enters the industry and competes with a second firm, which had been a monopolist.
The second firm finds that although demand is not perfectly elastic, it is now more elastic. What will happen
to the second firm’s marginal revenue curve and to its profit-maximizing price? (see pages 539-541).

Chapter 23 and Chapter 24