Summary 345*
preferred customers announcing which books are new in paperback.
For this segment, it sets an average price (including shipping) of $12.
According to the demand curve in part (a), only the highest value
consumers (whose willingness to pay is $12 or more) purchase at this
price. Check that these are the first 6 thousand book buyers on the
demand curve. In turn, because of increased competition, Hercules
has reduced its store price to $7 per book.
At P $7, how many books are bought in Hercules’ stores? (Make
sure to exclude online buyers from your demand curve calculation.)
Compute Hercules’ total profit. Then compute the sum of consumer
surplus from online and in-store sales. Relative to part (a), has the emer-
gence of online commerce improved the welfare of book buyers as a
whole? Explain.- Firm 1 is a member of a monopolistically competitive market. Its total
cost function is C 900 60Q 1 9Q 12. The demand curve for the
firm’s differentiated product is given by P 660 16Q 1.
a. Determine the firm’s profit-maximizing output, price, and profit.
b. Attracted by potential profits, new firms enter the market. A typical
firm’s demand curve (say, firm 1) is given by P [1,224 16(Q 2
Q 3 .. .Qn) 16Q 1 ], where n is the total number of firms. (If
competitors’ outputs or numbers increase, firm 1’s demand curve
shifts inward.) The long-run equilibrium under monopolistic
competition is claimed to consist of 10 firms, each producing 6 units
at a price of $264. Is this claim correct? (Hint:For the typical firm,
check the conditions MR MC and P AC.)
c. Based on the cost function given, what would be the outcome if the
market were perfectly competitive? (Presume market demand is
P 1,224 16Q, where Q is total output.) Compare this outcome to
the outcome in part (b). - Consider a regulated natural monopoly. Over a 10-year period, the net
present value of all the investment projects it has undertaken has been
nearly zero. Does this mean the natural monopoly is inefficient? Does it
mean the regulatory process has been effective? Explain.
Discussion QuestionPharmaceutical companies can expect to earn large prof-
its from blockbuster drugs (for high blood pressure, depression, ulcers, aller-
gies, sexual dysfunction) while under patent protection. What is the source of
these profits? Upon patent expiration, numerous rival drug companies offer
generic versions of the drug to consumers. (The original developer continues
to market the drug under its trade name and usually offers a second generic
version of the drug as well.) Discuss the effect of patent expiration on market
structure, pricing, and profitability for the drug.c08Monopoly.qxd 9/29/11 1:31 PM Page 345