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Chapter 10, Problem 11E 1 Bookmark Show all steps: ON

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(a) The AR curve is given by the equation:

Thus, total revenue or TR is given by: My Textbook Solutions

We can compute MR from TR as follows:

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[Note that for AR of the general form:

the MR is given by:

Comment

Step 2 of 14

Again, since average cost is constant at $ 6 per unit, the marginal cost, i.e., the cost of producing
the last unit is also $ 6 per unit.

Comment

Step 3 of 14

To draw the graphs of these curves, we construct the following table.

Q AR MR AC MC

0 11 11 6 6

1 10 9 6 6

2 9 7 6 6

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4/17/22, 1:38 AM Solved: Chapter 10 Problem 11E Solution | Microeconomics 9th Edition | Chegg.com
3 8 5 6 6
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4 7 3 6 6

5 6 1 6 6

6 5 -1 6 6

7 4 -3 6 6

8 3 -5 6 6

9 2 -7 6 6

10 1 -9 6 6

The table has been constructed by generating the column of values for Q ranging from 0 to 10
with unit increments and then the rest of the columns have been filled with the values computed
by putting in the corresponding values of Q in the equations. Note that the values of Q is
expressed in thousands.

Comment

Step 4 of 14

Plotting Q on the horizontal axis and AR, MR, AC and MC on the vertical axis we get the required
diagram:

Comment

Step 5 of 14

The monopolist’s profit maximizing condition is:

Plugging in for MC and MR, this equation becomes:

Therefore the profit maximizing output is 2500 units.

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Step 6 of 14

Now, by setting Q = 2.5 in the equation for the demand curve we can obtain the profit maximizing
price:

Comment

Step 7 of 14

Since the average cost per unit of production is $ 6 while the per-unit price is $ 8.5, the per unit
profit is:

And Q = 2.5. Therefore, the total profits are:

Since Q is measured in thousands, the total profits therefore are $6250.

Comment

Step 8 of 14

These are all shown in the diagram below:

Comment

Step 9 of 14

The Lerner index:

Comment

Step 10 of 14

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4/17/22, 1:38 AM Solved: Chapter 10 Problem 11E Solution | Microeconomics 9th Edition | Chegg.com

 (b) If aHome
price ceiling of $ tools

Study 7 is set, we can

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curve by putting P =7 and solving for Q:

Therefore, at the new price ceiling the output will be equal to 4000 units.

Since the price now is $ 7 and the per-unit cost is $ 6, the per unit profit is $ 1 and since the
output is 4000 units, the total profits are:

Comment

Step 11 of 14

In the diagram below the impact of setting a price ceiling of $ 7 is shown.

The output now is 4000 units and profits are equal to $ 4.

Comment

Step 12 of 14

The value of the Lerner index now is:

Comment

Step 13 of 14

(c) The largest level of output will be obtained if the price ceiling is set at the competitive price.
The competitive price is equal to the marginal cost. Therefore, the price that maximizes output
here is

As is shown in the diagram below, at a price of $ 6, the output level is equal to 5000 units.

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This can also be seen by putting in P = $ 6 in the demand curve as follows:

So, output is equal to 5000.

Comment

Step 14 of 14

Since here the price equals the marginal cost, the Lerner index value at this price is zero. Thus
there is no monopoly power at this price. This should also be intuitively clear since by setting the
ceiling at the competitive price the market power, i.e., the capacity of charging a price over and
above the marginal cost is taken away from the monopolist. Thus the monopoly power here is
zero.

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Recommended solutions for you in Chapter 10

Chapter 10, Solution 9E Chapter 10, Solution 5E

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