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1)Each of the following firms possesses market power
1)Each of the following firms possesses market power.Explain its source
a)merck,the producer of a patented cholesterol-lowering drug
b)Aliant,a provider of a telephone service
c) Chiquita,a banana supplier and owner of most banana plantations.
2. four friends,A,B,C and D have made a documentary about their hockey team.They are thinking of making the movie available for download on the internet,and they can act like monopolist,if they choose.Each time the movie is downloaded,the ISP charges them a fee of $4. The friends argue about what price to charge customers per dowload. The following table shows the demand schedule
price of download: $10, $8, $6, $4, $2, $0
Quantity of downloads demanded: 0, 1, 3, 6, 10, 15
a) calculate the TR and MR per download
b) A is proud of the film and wants as many people as possible to download it.What price should he choose?how many downloads will be sold.
c) B wants as much revenue as possible.what price should he choose?How many downloads will be sold
d)C wants to maximize profit.what price should he choose? How many downloads will be sold?
e) D wants to charge the efficient price.What price should he choose?How many downloads will be sold?
Expert Solution
a. Merck the producer of a patented cholesterol-lowering drug. The possession of a patent by Merck depicts that the government has created a barrier giving Merck the market power.
b. Alliant, a provider of a telephone service. When more calls are made average costs are lowered which gives the firm a cost advantage over the competitors which results in market power.
c. Chiquita, a banana supplier and owner of most banana plantations. Factually, Chiquita owns the largest portion of banana plantations, which means they possess higher control in comparison to the main source, bananas, hence giving Chiquita market power.
2.
a. Calculate the TR and MR per download
| Price per download | Downloads demanded | Total revenue | Marginal revenue |
|---|---|---|---|
| $10 | 0 | $0 | $0 |
| $8 | 1 | $8 | $8 |
| $6 | 3 | $18 | $5 |
| $4 | 6 | $24 | $2 |
| $2 | 10 | $20 | $-1 |
| $0 | 15 | $0 | $-4 |
At $6 we have 2 extra downloads than at $8. The difference in revenue between the download at $8 and $6 is $10 divided by the 2 extra units sold yields a marginal revenue of $5.
At $4 we have extra 3 downloads than at $6 ($24 - $18 =6 / 3 =2)
At $2 we have extra 4 downloads than at $4 ($20 - $24 = -4 / 4 = -1)
At $0 we have extra 5 downloads than at $2 ($-20 of lost revenue / 5 = $-4)
b. A ought to charge $0 to have the maximum 15 downloads.
c. B would choose the $4 price and would get 6 downloads with a revenue of $24.
d. C should charge $6 hence getting 3 downloads since if he had more downloads, marginal revenue would be lower than the marginal cost of $4.
e. D ought to charge $4 for an efficient price and he would get 6 downloads. Revenue which is equal to the marginal cost ($6 * $4 =$24 revenue.)
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