World Class Manufacturing Operations has enjoyed rapid growth in sales and high operating profits. But now the company faces potentially fierce competition from a large number of new competitors as WCMO's important basic patents expire during the coming year. Unless the company is able to thwart such competition, severe downward pressure on price and profit margins is anticipated.
Price Monthly Total Marginal Total Marginal Average Total
Output Revenue Revenue Cost Cost Cost Profit
$20 0 $0 $0 $0 $0 $0 $0
19 1 19 $19 12 $12 $12.00 $ 7.00
18 2 36 17 27 15 13.50 9.00
17 3 51 15 42 15 14.00 9.00
16 4 64 13 58 16 14.50 6.00
15 5 75 11 75 17 15.00 0
14 6 84 9 84 9 14.00 0
13 7 91 7 92 8 13.14 -1.00
12 8 96 5 96 4 12.00 0
11 9 99 3 99 3 11.00 0
10 10 100 1 105 6 10.50 -5.00
[Total costs include a risk-adjusted normal rate of return.]
(A) If the cost conditions remain constant, what is the monopolistically competitive high price-low output equilibrium in this industry? What are the industry profits?
(B) Under these same cost conditions, what is the monopolistically competitive low price-high output equilibrium in this industry? What are the industry profits?
(C) Now assume that WCMO is able to enter into restrictive licensing agreements with potential competitors and create an effective cartel in the industry. If demand and cost conditions remain constant, what is the cartel price-output and profit equilibrium?
A. Usually, a monopoly will maximize profits at MC=MR. But, because we are dealing with units, it isn't always just a point. Note first that this monopoly has no Fixed Costs. The Total Cost is only the addition of each subsequent MC to the previous ones. There are two profit maximizing possibilites, a monthly output of 2 sold at $18 each, or a monthly output of 3 sold at $17. In both cases profit is $9. The answer to ...
A table of costs and profits for a monopoly is provided and optimal solutions are found for the monopoly. The most interesting of three questions provided is C. In it, we discuss the optimal choice, when the monopolist can impose restrictive licensing on their competitors, when MC are lowest at low outputs.
Will these monopolies typically earn economic profits?
Many airline routes worldwide are served by only one airline (a monopoly). Within the U.S., these are often from a small or mid-sized city to a major carrier hub and frequently operated by a regional carrier under contract to the larger airline.
-Will these monopolies typically earn economic profits?
-Why do not other airlines enter these monopoly routes?
-Is price discrimination likely? If so, what type (1st, 2nd, or 3rd degree)? Will price discrimination increase profts?