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Consider the decisions of Virgin Galactic as it opens an exclusive line between Earth and the Moon. If Virgin Galactic is the sole airline operating this line, it acts as a monopolist in this market. The demand for flights to the Moon is segmented into two groups. Business travelers, who often have to buy last minute tickets, have a fully inelastic demand of 30 for any price between zero and 120 and zero demand for any price above 120. Families going on vacation, who can plan ahead, have a demand given by P = 120 − Q. Although Richard Branson (the founder of Virgin Galactic) had to pay billions of pounds to build the Virgin Galactic ship, by using renewable energy he cut his marginal cost to zero.
a) Assume first that Virgin Galactic is allowed to charge different prices to these different groups (for example, it can charge a different price if you purchase the ticket a few months in advance than if you purchase the ticket last minute). Calculate the monopoly prices charged for both business travelers __________ and families________ , and the total consumer surplus in the whole market____________.
The government is concerned about the monopoly power of Virgin Galactic. To measure the "social cost" of the Virgin Galactic pricing strategy you calculated in (a), the government compares the total surplus you found in (a) to the total surplus that would arise if Virgin Galactic would charge prices as if it was in a competitive equilibrium.
b) As the first step to help the government's calculation, compute the total demand for flights in the market_____________ .
c) With the total demand you have calculated above, calculate the price__________ , the producer surplus__________ , and the consumer surplus__________ that would arise if this was a perfectly competitive market.
d) To get the government measure of the "social cost" of Virgin Galactic pricing strategy, calculate the difference between the total surplus in the perfectly competitive market, and the total surplus you have computed in (a).________
Buy 2 get 1 free explain why 1 free is free to the buyer but not to the society ?
Road Runner Co is a Pakistani manufacturer making Bicycles. It exports to two markets,Bangladesh and Sri Lanka. Demand for Bicycles in thesetwo markets is given by the following Functions:
Bangladesh Q1 = 12 – P1
Sri Lanka Q2 = 8 – P2
Where Q1 and Q2 are respective quantities sold (in thousands) andP1 and P2 are the respective prices (in Pak. Rupees per unit) in the two markets. Total cost function is
C = 5 + 2 (Q1+ Q2)
a. Determine the company’s total profit function. Also,
(i) What are the profit maximizing levels of price and output for the two markets?
(ii) Calculate the marginal revenues in each market.
b. Now consider two cases:
(i) Company is effectively able to price discriminate in thetwo markets. What will
be the total profits?
(ii) Suppose the company does not engage in price discrimination. By charging thesameprice in the two markets what are the profit maximizing levels of price,output, and the total profits?
c. Analyze, with graphs, the two alternative pricing strategies available to the company.
Differentiate between a long-run and a short-run cost function. 5
(b) (i) Describe the relationship between the short-run and long-run average cost curves. 5
(ii) Why the long-run average cost curve also called the envelope curve? 5
(iii) Using an appropriate diagram, explain how does the long-run marginal cost derived? 5
1. (a) Illustrate the relation between Total Cost (TC), Total Fixed Cost (TFC) and Total Variable Cost (TVC) curves. Also, comment upon the shapes of these curves
(a) Determine by using calculus the best level of output of the firm by the marginal approach and
(b) find the total profit of the firm at this level of output.
Q3.
A perfectly competitive firm faces P = 4 and TC = Q3 - 7Q2 + 12Q + 5.
Road Runner Co is a Pakistani manufacturer making Bicycles. It exports to two markets,Bangladesh and Sri Lanka. Demand for Bicycles in thesetwo markets is given by the following Functions:
Bangladesh Q1 = 12 – P1
Sri Lanka Q2 = 8 – P2
Where Q1 and Q2 are respective quantities sold (in thousands) andP1 and P2 are the respective prices (in Pak. Rupees per unit) in the two markets. Total cost function is
C = 5 + 2 (Q1+ Q2)
a. Determine the company’s total profit function. Also,
(i) What are the profit maximizing levels of price and output for the two markets?
(ii) Calculate the marginal revenues in each market.
b. Now consider two cases:
(i) Company is effectively able to price discriminate in thetwo markets. What will
be the total profits?
(ii) Suppose the company does not engage in price discrimination. By charging thesameprice in the two markets what are the profit maximizing levels of price,output, and the total profits?
c. Analyze, with graphs, the two alternative pricing strategies available to the company.
AVAC is the only pharmaceutical firm producing a Vaccine.
The Demand Curve for its product is Qd = 250 – 50 P
where P is Price and Q are packs of vaccines in ‘000
Total Cost Function estimated by the firm is TC = 15 + 0.5Q
where Q is monthly output.
a. What is the market structure of AVAC? State its characteristics.
b. To maximize profit,
(i) What will be the optimum price and how many packs of Vaccine should the firm produce and sell per month?
(ii) If this number of packs is produced and sold, what will be the firm’s monthly profit?
c. Using available information, draw AVAC’s demand, marginal revenue and marginal cost curves in a graph and clearly label thefirm’s profit maximizing price, quantity and profit. Do you observe any welfare loss? If so, also indicate and label the area on the graph.
d. Assume all other pharmaceutical firms in the market start producing the Vaccine and the market becomes competitive. What will be the impact on price and marginal revenue?Would the market structure of the firm remain the same? Support your answer with help of the firm’s graph.
You have been hired by Kia as manager for its Pakistan operations. Assume following is the short-run production function at their assembly plant outside Karachi:
Q = 10L2 – 0.5 L3
where L is variable input labor, Q is output of Cars assembled
a. Find the ranges of the three stages of production.
b. Demonstrate the relationship between Total Production, Marginal Product and AverageProduct in a hypothetical graph and clearly label the three stages as per the values of Lyou observed in (a) above
c. At the end of the year it is expected that output will double with purchase ofnew equipment and machinery. The production function is estimated to be
Q = 60L.30K.70
where L is labor and K is capital.
Suppose initial L1 = 1 and K1 = 1. When inputs are in increased to L2 = 2 and K2 = 2,
do you observe increasing, decreasing or constant returns to scale?
d. Assume Kia Head Office is considering hiring more laborers either at their Gwadarplant or alternatively at the Karachi plant. What will be your advice if workers’ marginal product is 40 at wage of Rs=5/hour in Karachi and marginal product is 28 at wage of Rs=4/hour in Gawdar?
The investors of Smith Autos have put up $500,000 to construct a building and purchase all equipment required to wash cars. The investors expect to earn a minimum return of 10% on their investment. If the money to set up the business had been borrowed from a bank instead, the car wash owners would have paid a 10% interest rate. The car wash is open 50 weeks per year and washes 800 cars per week. Whether operative or not, the company must pay $1,000 per week return to investors and $1,000 per week as insurance. The variable costs for the 800 weekly washes includes $1,000 labor cost and $600 materials cost. There are many car washes of equal quality and service in the area and they charge $5 per car wash.
a) Based on your knowledge of the different forms of market structure, do you think Smith Autos should stay in business? Show calculations.
b) Graphically represent the company's performance, showing profit or loss.
c) Another car wash company operates inside a gated community in the vicinity and offers its services at $6 per wash under a licensed agreement. Highlight how is it possible for this company to charge a higher price than the market and still stay in business.
d) After a few mouths, due to the forces of demand and supply, the market price is pushed down to $1.5 per car wash. What course of action will you suggest to Smith Autos?
#340153 on Dec 2023