Summary 343b. Many experts contend that maximizing short-run profit is
counterproductive for OPEC in the long run because high prices
induce buyers to conserve energy and seek supplies elsewhere.
Suppose the demand curve just described will remain unchanged
only if oil prices stabilize at $50 per barrel or below. If oil price
exceeds this threshold, long-run demand (over a second five-year
period) will be curtailed to Q 42 .4P (or P 105 2.5Q).
OPEC seeks to maximize its total profit over the next decade. What
is its optimal output and price policy? (Assume all values are present
values.)- Consider once again the microchip market described in Problem 9 of
Chapter 7. Demand for microprocessors is given by P 35 5Q, where
Q is the quantity of microchips (in millions). The typical firm’s total cost
of producing a chip is Ci5qi, where qiis the output of firm i.
a. Suppose that one company acquires all the suppliers in the industry
and thereby creates a monopoly. What are the monopolist’s profit-
maximizing price and total output?
b. Compute the monopolist’s profit and the total consumer surplus of
purchasers. - Consider again the New York taxi market, where demand is given by Q
7 .5P, each taxi’s cost is C 910 1.5q, and ACmin$8 at 140 trips
per week.
a. Suppose that, instead of limiting medallions, the commission charges
a license fee to anyone wishing to drive a cab. With an average price
of P $10, what is the maximum fee the commission could charge?
How many taxis would serve the market?
b. Suppose the commission seeks to set the average price P to maximize
total profit in the taxi industry. (It plans to set a license fee to tax all
this profit away for itself.) Find the profit-maximizing price, number
of trips, and number of taxis. How much profit does the industry
earn? (Hint:Solve by applying MR MC. In finding MC, think about
the extra cost of adding fully occupied taxis and express this on a cost-
per-trip basis.)
c. Now the city attempts to introduce competition into the taxi market.
Instead of being regulated, fares will be determined by market
conditions. The city will allow completely free entry into the taxi
market. In a perfectly competitivetaxi market, what price will prevail?
How many trips will be delivered by how many taxis?
d. Why might monopolistic competition provide a more realistic
description of the free market in part (c)? Explain why average price
might fall to, say, only $9.00. At P $9.00, how many trips would a
typical taxi make per week? (Are taxis underutilized?) How many taxis
would operate?
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