9781118041581

fare is $300.) In addition, the long-run average (one-way) cost per

passenger along this route is estimated to be $200.

a. Some economists have suggested that during the 1980s and 1990s

there was an implicit cartel among European air carriers whereby the

airlines charged monopoly fares under the shield of regulation. Given

the preceding facts, find the profit-maximizing fare and the annual

number of passenger trips.

b. In the last 10 years, deregulation has been the norm in the European

market, and this has spurred new entry and competition from discount

air carriers such as Ryan Air and EasyJet. Find the price and quantity

for the European air route if perfect competition becomes the norm.

5. Consider a natural monopoly with declining average costs summarized
   by the equation AC 16/Q 1, where AC is in dollars and Q is in
   millions of units. (The total cost function is C  16 Q.) Demand for
   the natural monopolist’s service is given by the inverse demand equation
   P  11 Q.
   a. Determine the price and output of the unregulated natural
   monopolist.
   b. Suppose a regulator institutes average-cost pricing. What is the
   appropriate price and quantity?
   c. Answer part (b) assuming the regulator institutes marginal-cost
   pricing. What is the enterprise’s deficit per unit of output? How might
   this deficit be made up?


6. Firm S is the only producer of a particular type of foam fire retardant
   and insulation used in the construction of commercial buildings. The
   inverse demand equation for the product is

where Q is the annual sales quantity in tons and P is the price per ton.

The firm’s total cost function (in dollars) is

a. To maximize profit, how much foam insulation should firm S plan to

produce and sell? What price should it charge?

b. Compute the firm’s total profit.

7. Suppose that, over the short run (say, the next five years), demand for
   OPEC oil is given by Q 57.5  .5P or, equivalently, P  115 2Q.
   (Here Q is measured in millions of barrels per day.) OPEC’s marginal
   cost per barrel is $15.
   a. What is OPEC’s optimal level of production? What is the prevailing
   price of oil at this level?

C1,400,000300Q.05Q^2.

P1,500.1Q,

342 Chapter 8 Monopoly

c08Monopoly.qxd 9/29/11 1:31 PM Page 342