Chapter 10 Case Problem Set A

1.

An oligopolist has the following linear marginal cost curve: MC = 1 + 0.5 Q

At prices below $5, the firm faces the following demand curve: Q = 9 - P
At prices above $5, the firm faces the following demand curve: Q = 24 - 4 P
Plot the firm' s kinked dem and curve and marginal revenue curve and the firm 's
marginal cost curve on the graph below.

Price, MR, MC

5
4
3
2
1
0
0

Quantity (Q)

Within what range of m arginal cost will the firm m aintain the same price and
level of output?

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The m anagers of General House and Westing Electric, two competing firms that sell
products that are virtually identical, have decided to form a secret agreement. They intend
to cooperate in setting prices and to adjust their output accordingly. They have the
following cost curves:
General House:

MC = 1/2 + Q

ATC = 1/2 + 1/2 Q

Westing Electric:

MC = 1/2 + Q/3

ATC = 1/2 + Q/6

They face the following industry demand curve:

Q = 16 - 2 P

Use this information to solve Problems 2 and 3.

2.

Plot the industry demand, marginal revenue, marginal cost, and average total cost
on the graph below. Use the graph to determine industry price and output under
the assumption that each firm is m aximizing profit without cooperating with th e
other (that the industry is competitive) and then calculate each firm's total
revenue, total cost and profit.

Price, MR, Cost

7
6
5
4
3
2
1
0
0

10

11

12

13

14

15

16

Quantity (Q)

Managerial Economics: Principles and Worldwide Applications, 7/e

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3.

Now assume that the two firms decide to behave as a centralized cartel.
Determine industry price and output and then calculate each firm' s total revenue,
total cos t an d prof it. Ar e bot h of th e firm s better off than they were when they
were competing? Why or why not?

Managerial Economics: Principles and Worldwide Applications, 7/e

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Chapter 10 Case Problem Set B

The graph that follows represents several features of a market that is dominated
by a price leader. Market demand, the horizontal sum of the followers' marginal
cost curves, and the leading firm's marginal cost curve are shown. Based on the
curves plotted on the graph, draw in the price leader's demand and marginal
revenue curve and identify the equilibrium m arket pr ice, total output, and the
division of total output between the leader and the followers. Label the graph
carefully.

Price, MR, Cost

4.

24
22
20
18
16
14
12
10
8
6
4
2
0

Market Demand

MC Followers

MC Leader

10

20

30

40

50

60

70

80

90 100 110 120

Quantity (Q)

Managerial Economics: Principles and Worldwide Applications, 7/e

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5.

Ferrous Scrounge is the manager of a firm that recycles metal scrap. The firm' s
average cost is equal to $140 per ton. It faces the following linear dem and curve:
Q = 500 - 2P.
Derive the firm's profit function and plot it on the graph below.

6000

Profit

5000
4000
3000
2000
1000
0
0

20

40

60

80

100

120

140

160

180

200

220

Quantity (Q)

What is the firm's profit-maximizing price and output? What will the firm's profit
be at this level of output?

If Ferrous Scrounge decides to maximize sales, what price will be charged and
what level of output will be produced? What will the firm's profit be at this level
of output?

Managerial Economics: Principles and Worldwide Applications, 7/e

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If Ferrous Scrounge decides to maximize sales subject to the c onstraint that profit
may be no less than 1,345.5, what price will be charged and what level of output
will be produced?

Managerial Economics: Principles and Worldwide Applications, 7/e

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Chapter 10 Case Problem Set C

6. The City of Erie, Pennsylvania, is considering the development of lake shore ferry
facilities that would transport the pu blic across Lake Erie to Canada. The inverse
demand curve for ferry service is defined as follows: P = 60 0.01Q
Erie has obtained bids from two ferry operators. Firm 1 has a marginal cost per
passenger of $10. Firm 2 has a marginal cost per passenger of $14.
Your task is to predict the price and quantity that will prevail if both ferry
operators are given access to the facilities. Assume that they will operate as a
Cournot duopoly.

Quantity Produced by Firm 1 (Q1)

Derive and graph the firms reaction functions, determine the number of
passengers each firm will serve, and compute the market price.

5000
4500
4000
3500
3000
2500
2000
1500
1000
500
0
0

250

500

750

1000

1250

1500

1750

2000

2250

2500

Quantity Produced by Firm 2 (Q2)

Managerial Economics: Principles and Worldwide Applications, 7/e

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