HW6 Fall 2012
Due Date: December 3rd, 2012 Principles of Econ: Micro
Name__________________________
1.
Each of the following firms possesses market power. Explain its source.
a)
Merck, the producer of the
patented cholesterol-lowering drug Zetia.
b)
Verizon, a provider of local
telephone service.
c)
Chiquita, a supplier of bananas
and owner of most banana plantations.
2. Download
Records decides to release an album by the group Mary and the Little Lamb. It
produces the album with no fixed cost, but the cost of downloading the album to
a CD and paying Mary her royalty is $6 per album. Download Records can act as a
single-price monopolist. Its marketing division finds that the demand schedule
for the album is as shown in the accompanying table:
Price
of Album
Quantity
of Albums Demanded
TR
MR
$22
0
$20
1000
$18
2000
$16
3000
$14
4000
$12
5000
$10
6000
$8
7000
a)
Calculate the Total Revenue and
Marginal Revenue per album.
b)
The marginal cost of producing
each album is constant at $6. To maximize profit what level of output should
Download Records choose, and which price should it therefore charge? Explain
your answer.
c)
Mary renegotiates her contract
and now needs to be paid a royalty of $14 per album. So the marginal cost rises
to be constant at $14. To maximize profit, what level of output should Download
Records now choose and what price should it charge for each album?