92442 - Marginal Profit and Marginal Cost - Monopolistic Competition - Planet Money Podcast “Kid Rock vs The Scalpers - Economics Assessment Answer

Assessment Task:

92442 - Marginal Profit and Marginal Cost Economics Assessment Answer

Questions

Exercise 1. Your firm’s research department has estimated your total revenues to be R(Q) = 30, 000Q − 80Q2 and your total costs to be C(Q) = 1, 000 + 20Q2. (Note that the marginal functions are MR(Q) = 30, 000 − 160Q and MC(Q) = 40Q).

(a)    What level of Q maximizes net benefits?
(b)    What is the marginal benefit and marginal cost at this level of Q?
(c)    What is the maximum level of net benefits?
(d)    What is another word for net benefits in this example?

Exercise 2. Suppose you operate in a monopoly environment and you set your price in order to achieve maximum profits. Is your demand elastic, unitary elastic, or inelastic?  Does your answer change if you were in a monopolistically competitive market? What happens to the elasticity when you go from a monopolistic market to a monopolistically competitive one?  Explain and give an example.

Exercise 3. You are the manager of a monopoly with costs, demand, and marginal revenue as in the graph at the top.
a.    Does the fact that you operate in a monopoly always guarantee that you can achieve higher profits by increasing the price? Explain.
b.    Draw the area representing the profits on the top graph.
c.    Suppose one of your suppliers just announced an increase in prices for a specific part that your product requires.  What should the impact be to each of the curves on the top graph? Explain carefully.
d.    Suppose economic conditions change in such a way that the demand curve for your company shifts left.
i.    Draw a demand curve on the bottom graph on that leads to zero economic profits.
ii.    Draw a demand curve on the bottom graph on such that any further leftward demand shift will cause you to shut down.

Exercise 4. The following questions refer to the Planet Money podcast “Kid Rock vs The Scalpers
•    What is the product and how is the problem related to supply and demand?
Why was one of the solutions proposed by Kid Rock increasing the number of shows?
•    Draw a graph explaining your answer.
a.    Kid Rock seems to feel very strongly about the price of the tickets offered in his concerts. How are the prices related to supply and demand?
b.    Draw a graph illustrating the consumer surplus region and its meaning for the story. Do you think consumers derive a large value from the pricing schemes introduced by Kid Rock?  What measures did Kid Rock employ to ensure that he could enforce optimal pricing schemes?
c.    Illustrate the effect of scalpers on the consumer surplus region. That is, how much surplus is derived by consumers when scalpers can buy lower-priced tickets and resell those to the public at higher prices?

Exercise 5.  For this question, refer to the article “The Inside Story of Wawa” 

a.    The manager of a newly opened store asks you to advise her on an optimal pricing scheme for specialty sandwiches, signature fountain drinks and combination packages of sandwiches and drinks.  Market research reveals that the market size for the newly opened facility is about one million consumers of four types who can be classified as follows:

S:   Have a strong preference for Wawa’s signature sandwiches
F:   Have a strong preference for Wawa’s signature fountain drinks
SF: Like to buy sandwiches and drinks as a combination
NP: Have no preference for either product; stop in at Wawa and buy eats occasionally

b. In a document of no more than two double spaced pages, use Michael Porter’s Five Forces framework to explain how Wawa applies economic concepts to business strategy.  As a directed requirement, for the power of suppliers, make labour one of the inputs you analyze.  How does Wawa structure compensation and align incentives to control cost and achieve company objectives? (monopolistic competition)

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