A
monopolist’s demand curve is: P = 400 – 2 Q. His marginal costs are represented
by: MCm = ACm = 40.
(a)
Solve for the monopolist’s profit-maximizing
outp, price, and profits.
(b)
Suppose a potential entrant is considering
entering, but the monopolist has a cost advantage in that the MC for the
potential entrants is: MCe = ACe = 50. Assume that the monopolist continues to
maximize his profits, solve for the residual demand curve for the potential
entrant.
(c)
Suppose the potential entrant follows the
Cournot assumption about the monopolist’s output. Solve for the potential
entrant’s output, price, and profits in this scenario. What are the new
monopoly profits?
(d)
Is there a price that the monopolist can charge
to deter entry? What is the monopoly profit at this price? Should a rational
monopolist go for the entry-deterring price or will it accept the joint
profit-maximization in this situation?
16)Suppose
a monopolist has a choice of picking from two streams of profits. Stream1
represents his profits if he charges the entry deterring limit price and
stream2 represents the profits if he lets the entry happen and adapts to the
entry of new firms at different intervals. Assume the market discount rate is
5%/year.
Year: XXXXXXXXXX10
Stream 1: XXXXXXXXXX XXXXXXXXXX
Stream 2: XXXXXXXXXX XXXXXXXXXX
(a)
Should he charge the limit price to deter entry
or accept the entry? Assume his goal is maximize the PV of long-run profits.
(b)
Suppose the market discount rate is 20% instead
of 5%. Should he now charge the limit price to deter entry or accept the entry?
Assume his goal is maximize the PV of long-run profits.