Answer to Question #194162 in Microeconomics for fahmida

Question

 2. The market for corn is perfectly competitive and all firms are in long-run equilibrium currently. What  will happen in the market if the incomes of corn consumers rise, assuming corn is an inferior good?  Use two appropriately labelled graphs of the market and the individual perfectly competitive firm to  explain.

3. A movie production company is planning to make its new movie available online so that it can enjoy  monopoly power. Each time the movie is downloaded the production company has to pay 4 taka to the  internet service provider. Now it is deciding what price to charge for each download. The numbers below shows the demand schedule for the company, Price per download dollar  - 10, 8, 6, 4, 2, 0. Quantity of downloads demands 0, 1, 3, 6, 10, 15.

a) Calculate the total revenue and marginal revenue per download.  

b) To maximize profit what price should be charged and how many downloads would need to be sold?

Answer 1

(2)

If corn is an inferior good, then with rise in income of consumers, the demand of corn falls. Hence, there will be excess supply and as a result, prices will fall. 

If we look at it from the market's perspective, the demand schedule will shift to the left as consumption falls i.e. consumers start demanding less corn. Graphically, it can be seen as follows,

As the demand falls for corn, the demand schedule shifts to the left, evidently quantity demanded falls from Q₀ to Q₁ and because of excess supply, price falls from P₀ to P₁ as is shown in the diagram. 

For the firm itself, it was in long run equilibrium, hence there was no super normal profit. Therefore, if the price and quantity both go down, the firm will incur losses. Diagrammatically, it can be expressed as follows,

As price goes below the average cost curve, the firm will incur losses.

(3)

(a)

Given the price and quantity, total revenue is calculated as the product of price and quantity. The marginal revenue is the difference between total revenue of the nth unit and the total revenue of the (n-1)th unit.

The profit maximizing condition is MR=MC, the given MC is 4 and MR is calculated below. The point where MR=MC is the profit maximization point which gives price to be charged and quantity to be sold.

Answer of part a) is shown in the column of TR and MR.

(b)

Since MR=MC is 4 shown through bold. To maximize profit, $2 should be charged and 10 units of downloads should be sold.