Task 10

1. What is marginal revenue and how does it relate to the demand curve?

The marginal revenue is the extra revenue you earn when producing one more
product/good. Its relationship with the demand function is that it has the same intercept and
twice the slope.
MR is smaller than the price. Demand is downward slopingc, so to increase demand, he
needs to lower the price.
2. In general, how does a monopolist set its price?

In traditional economics, the goal of a firm is to maximize their profits. This means
they want to maximize the difference between their earnings, i.e. revenue, and their
spending, i.e. costs. To find the profit maximizing point, firms look at marginal
revenue (MR) – the total additional revenue from selling one additional unit of output
– and the marginal cost (MC) – the total additional cost of producing one additional
unit of output. When the marginal revenue of selling a good is greater than the
marginal cost of producing it, firms are making a profit on that product. This leads
directly into the marginal decision rule, which dictates that a given good should
continue to be produced if the marginal revenue of one unit is greater than its
marginal cost. Therefore, the maximizing solution involves setting marginal revenue
equal to marginal cost.

This is relatively straightforward for firms in perfectly competitive markets, in which

3. What is the ‘’Lerner index’’?

The Lerner index, measured as the percentage markup of price above marginal cost, (P-
MC)/P, has often been used as a measure of a firm’s market power. The Lerner index always
has a value between zero and one. For a textbook-perfectly competitive firm, P=MC so that
L=0. The larger is L, the greater is the degree of market power.

Monopolist never sets price at inelastic point, because increase in price will less decrease the
demand and the costs will go down, so the revenue goes up and costs goes down so profit
increase.
 4. How will we determine the profit maximizing price for Apple?

Determine the marginal revenue for apple.

Show that apple maximizes their profit at a price of 500, with Q=9,000
TR = 1/30Q^2+800q

MR = TR’
MR= 800-2/30Q
MC= 200
MR=MC
2/30Q + 800 = 200
-2/30Q= -600
Q=9,000
P= 500

5. What are the deadweight losses caused by a monopoly?

In a monopoly, the firm will set a specific price for a good that is available to all consumers. The
quantity of the good will be less and the price will be higher (this is what makes the good a
commodity). The monopoly pricing creates a deadweight loss because the firm forgoes
transactions with the consumers. The deadweight loss is the potential gains that did not go to
the producer or the consumer. As a result of the deadweight loss, the combined surplus (wealth)
of the monopoly and the consumers is less than that obtained by consumers in a competitive
market. A monopoly is less efficient in total gains from trade than a competitive market.
Compare welfare monopoly to welfare competitive market (ideal situation). Deadweight loss is
the loss in welfare.

6. How big is the deadweight loss in the example of Apple?

P = MC
-1/30Q + 800 = 200
Q = 18,000

Deadweight loss: ½ x 300 x 9,000 = 1,350,000

7. What is a natural monopoly?

A natural monopoly is that one firm can produce the total output of the market at lower cost than
several firms could.
A natural monopoly is a type of monopoly that exists typically due to the high start-up costs or
powerful economies of scale of conducting a business in a specific industry which can result in
significant barriers to entry for potential competitors. A company with a natural monopoly might be
the only provider of a product or service in an industry or geographic location. Natural monopolies
can arise in industries that require unique raw materials, technology, or similar factors to operate.

8. Is the Dutch Railways (‘NS’) a natural monopoly?

Yes, NS is the biggest in the train market in the Netherlands, they are subsidized by the
government so they could produce total output at a lower cost than other firms could. It is
created by the government. The NS profits for the large economies of scale.

Task 11
1. What is the impact of taxes, subsidies and price regulations in perfect competitive markets?

In a perfect competitive market these changes affect the consumers surplus, the producer
surplus and the total welfare. And a deadweight loss occurs.
With a tax there is a wedge between wat the consumers pay and what the producer gets. Some trades
are not being done.
With a subsidy, producer and consumer surplus goes up. The deadweight loss is the amount that the
government needs to pay the subsidies, it is extremely costly.
Binding floor price with a high price gives a excess supply. More producers want to supply than what
consumers demand. The government buys the excess supply for a high price, which gives a deadweight
loss.
Binding price ceiling with a low price gives a excess demand. More people demand the good than what is
being supplied. Quantity goes down so there is a deadweight loss.
2. Show the deadweight loss in the milk example at hand and how to obtain it.
 3. What is the role of a patent?

A patent provides its owner with the right to exclude others from exploiting the patented
technology, including, for example, making, using, or selling the patented invention. This
“exclusive right” enables the patent owner to recoup development costs and obtain a return of
investment in the development of the patented technology. Effective patent protection
stimulates research and is a key requirement for raising venture capital. It is also crucial to
overall economic growth. A company that decides to file patent applications should adopt a
strategic approach that obtains value from patents while minimising costs associated with
obtaining the patents.

4. What is the impact of taxes and price regulations in a monopoly?

In a monopoly the consumer surplus often grows and the producer surplus declines and
there is a change in total welfare, and a deadweight loss occurs.
Taxes make higher prices and lower quantities. Taxes affect MC. Increase DWL.
Price regulation affect MR. Price lower than monopolist price leads to lower DWL.

5. How, under a monopoly, can the government achieve the maximum surplus by price
regulations and subsidy?

Government needs to set the price at the point where MC-curve crosses demand curve (P=MC). The
government needs to subsidize the company. If you force the monopoly to set a price, then the price is
below AC, so they make losses, thus the government needs to subsidize the monopoly.

6. Why are economists quite skeptical about the feasibility of such optimal regulation?
1. Government is not aware about demand and supply curve so they don’t know what a good price
is.
2. Regulators cannot subsidize
7. Why might the stimulation of competition have beneficial effects?

It drives the price down naturally and not by the government.