Thus, competitive profits are only those which are excess profits after the total costs are covered.
Q7) Banana computer company has fixed costs of production of $100,000, while each unit costs $600 of labour and $400 of materials and fuel. At the price of $3000, each $10 reduction in price, banana computers increases 1000 units, calculate the marginal cost and marginal revenue for banana computers and determine is monopoly price and quantity.
Q9) Explain the error in the following statement: "A firm out to maximize its profit will always charge the highest price that the traffic will bear". State the correct result, and use the concept of marginal revenue to explain the difference between the correct and the erroneous statements.
It should be noted that the aim of the monopolist is not to maximize profit and not maximize the price. Monopolists can only do this by identifying the price level which yields the highest profits. This occurs at MC = MR which is not often the highest price that a monopolist can charge. Charging an overly high price reduces the quantity demanded and will increase the marginal cost resulting into a shrink in profit.
Q1) Review collusive oligopoly and monopolistic competition, which are two theories of imperfect competition discussed in this chapter. Draw up a table that compares perfect competition, monopoly, and the two theories with respect to the following characteristics: (a) number of firms; (b) extent of collusion; (c) price vs marginal cost; (d) price vs. long run average cost; (e) efficiency.
Number of Firms
Large number of sellers
Few large producers
Extent of Collusion
Control over price but mutual interdependence
Price vs. Marginal Cost
Price increase will lead to a substantial decrease in demand, thus, higher MC
Price increase wi