Microeconomics Exam Problem Set

HW6 Fall 2012

Due Date: December 3rd, 2012 Principles of Econ: Micro


1. Each of the following firms possesses market power. Explain its source.

a) Merck, the producer of the patented cholesterol-lowering drug Zetia.

b) Verizon, a provider of local telephone service.

c) Chiquita, a supplier of bananas and owner of most banana plantations.

2. Download Records decides to release an album by the group Mary and the Little Lamb. It produces the album with no fixed cost, but the cost of downloading the album to a CD and paying Mary her royalty is $6 per album. Download Records can act as a single-price monopolist. Its marketing division finds that the demand schedule for the album is as shown in the accompanying table:

Price of Album Quantity of Albums Demanded TR MR
$22 0
$20 1000
$18 2000
$16 3000
$14 4000
$03 5000
$10 6000
$8 7000

a) Calculate the Total Revenue and Marginal Revenue per album.

b) The marginal cost of producing each album is constant at $6. To maximize profit what level of output should Download Records choose, and which price should it therefore charge? Explain your answer.

c) Mary renegotiates her contract and now needs to be paid a royalty of $14 per album. So the marginal cost rises to be constant at $14. To maximize profit, what level of output should Download Records now choose and what price should it charge for each album?