ECON 625 Managerial Economics Problem Set 5

1)            Questions 1 through 5 refer to the following scenario. Suppose three firms face the same total market demand for their product. This demand is:

Price (P)

Quantity (Q)

$80

20,000

70

25,000

60

30,000

50

35,000

Suppose further that all three firms are selling their product for $60 and each has about one-third of the total market.

What is the amount of total revenue each firm receives, in dollars?

2)            Now assume that one of the firms, in an attempt to gain market share at the expense of the others, drops its price to $50. The other two quickly follow suit. What is the amount of total revenue each firm now receives, in dollars, rounded to the nearest dollar?

3)            What impact has the price drop had on the revenue of each firm?

Each firm has less revenue.

Each firm has more revenue.

The price-dropper has more revenue and the others have less.

The price-dropper has less revenue and the others have more.

4)            If the firms had all raised their prices to $70 instead of lowering price, what would be the amount of total revenue each firm would have received, in dollars, rounded to the nearest dollar?

5)            Would the firms have been better off raising the price to $70, lowering to $50, or making no change?

Raising to $70

Lowering to $50

Making no change (keeping price at $60)

6)             

Questions 6 through 10 refer to the scenario that follows. A monopolistically competitive firm has the following short-run inverse demand, marginal revenue, and cost schedules for a particular product:

P = $45 – $0.2Q

MR = $45 – $0.4Q

TC = $500 + $5Q

MC = $5

What quantity would maximize profits for this firm? (Hint: Recall that profit maximizing is where MR = MC)

7)            At what price should this firm sell its product?

8)            What would be the amount of the firm’s total revenue at the quantity and price identified in the prior two questions?

9)            What would be the amount of the firm’s profit (positive number) or loss (negative number) at the quantity and price identified in questions 6 and 7?

10)         What do you think would happen in this market in the long run?

New firms would enter.

Some existing firms would leave.

Some existing firms would stay but no new firms would enter.

There is not enough information to make this determination.