Question

3. The zoning rule is revoked, and the monopolist in problem 2 can no longer exclude others from using the same technology and producing boxes, so the market structure changes from monopoly to perfect competition. (That is, assume that all firms are price-takers and that they produce at minimum average cost in equilibrium.) (a) What will the market price and quantity be? (b) Calculate consumer's surplus under this market structure (c) Calculate aggregate producer profits and producer's surplus. (d) Comparing the two market structures for this industry, which has a larger social surplus (sum of producer's and consumer's surplus)? it is -4. Which industry 4. The elasticity of demand in the local hardware industry is -1.5, while in the video market kup over marginal cost (as a percentage of price)? In answering, calculate the markup for each.

Answer 1

Q4) The markup of the local hardware industry can be calculated by using the inverse elasticity rule that is by using the following formula:

(P - MC) / P = 1 / e , where e is the elasticity of demand.

So,    (P - MC) / P = 1 / 1.5

(P - MC) / P = 10 / 15

(P - MC) / P = 0.66

The markup of the video market can be calculated by using the inverse elasticity rule that is by using the following formula:

   (P - MC) / P = 1 / e , where e is the elasticity of demand.

(P - MC) / P = 1 / 4

  (P - MC) / P = 0.25

The local hardware industry has a higher markup over the marginal cost of 0.66 as compared to video market which has a markup of 0.25.

Q5) Price = $0.5

Marginal cost = $ 0.2

The firm's degree of monopoly power can be calculated using the formula of Lerner index that is we can use the following formula:

(P - MC) / P where P is the price charged and MC is the marginal cost of the producer.

= (0.5 - 0.2) / 0.5

= 0.3 / 0.5 = 0.6 is the answer.

Since price is greater than the marginal cost, the firm has some control over the market and the degree of monopoly power is 0.6.