Author Question: Use Figure 13.1 above to help with the following question. Why is it true that at every level of ... (Read 66 times)

Jramos095 · **on:** Jun 29, 2018

Use Figure 13.1 above to help with the following question. Why is it true that at every level of output except the first unit, the monopolist's marginal revenue (MR) is below price.

What will be an ideal response?

Question 2

Suppose that Bill is a big movie buff and enjoys renting movies from the local video rental outlet.

Assume that he is willing to pay 5 for the first movie he rents for the weekend but would only pay 4 for a second and still only 3 for a third movie. If the video rental franchise charges 3.50 per movie what will Bill's consumer surplus be and why? Assume now that the video rental franchise now has a new package deal in which it offers to rent three movies to customers at a price of 9.00 would Bill be interested? How much consumer surplus would he enjoy now? What is the maximum price that the video rental franchise could charge and still make Bill interested in the package deal?

zenzy · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

This is so because (1) we assume that the monopolist must sell all its product at a single price (no price discrimination) and (2) to raise output and sell it, the firm must lower the price it charges. Selling the additional output will raise revenue, but this increase is offset somewhat by the lower price charged for all units sold. Therefore, the increase in revenue from increasing output by 1 (the marginal revenue) is less than the price.

Answer to Question 2

Bill will enjoy a consumer surplus of 2.00 . He'll rent the first movie and enjoy a surplus of 1.50 (5.00 - 3.50) and he'll rent the second movie and enjoy a surplus of .50 (4.00 - 3.50). He will not rent the third movie since this will result in negative consumer surplus. If the video rental franchise offers a package deal for 9.00 Bill will take it. The reason is that his consumer surplus will be 3.00 (5 + 4 + 3 - 9). The maximum price that could be charged for the package deal would be one in which the consumer surplus is the same for Bill as it would be if he had to pay for each of the movies separately. Since the 9 price leaves him with a consumer surplus of 3 it must be that 10 would be the maximum that he would be willing to pay since that deal still provides him with a 2 surplus.