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Monopoly Price-Output Decision

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Calvins's Barber Shops, Inc., has a monopoly on barbershop services provided in the south side of Chicago because of restrictive licensing requirements, and not because of superior operating efficiency. As as monopoly, Calvin's provides all industry output.. For simplicity, assume that Calvins's operates a chain of barbershops and the each shop has an average cost-minimizing activity level of 750 haircuts per week, with Marginal Cost= Average Total Cost= $20 per haircut.

Assume that demand and marginal revenue curves for haircuts in the south side of chicago market are:

P=$80-$0.0008Q
MR=$80-$0.0016Q

where P is price per unit, MR is marginal revenue, and Q is total firm output (haircuts).

A. Calculate the monopoly profit-maximizing price-output combination, and the competitive market long-run equilibrium activity level.

B. Calculate monopoly profits, and discusses the "monopoly problem" from a social perspective in this instance.

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Solution Preview

The profit-maximizing rule for a monopoly is MR = MC, so we have 80 - 0.0016Q = 20. Solving for Q gives Q = 37500. The price = $80-$0.0008Q = $50.

In the competitive market in the long run, P = MC, so we should expect hair cut price ...

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Monopoly Price-Output Decision

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price output decisions for perfect competition and monopoly

Please see the attachment.
Sun City, Arizona, a retirement community that features full-service living arrangements, is considering two proposals to provide lawn care to elderly residents. First, a national lawn care firm has offered to purchase the city's lawn care equipment at an attractive price in return for an exclusive franchise on residential service. The second proposal would allow several small companies to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individual companies would bid for the right to provide service in a given neighborhood. The city would then allocate the business to the lowest bidder.

The city has conducted a survey of Sun City residents to estimate the amount they would be willing to pay for various amounts of lawn care service. The city has also estimated the total cost of service per resident. Service costs are expected to be the same whether or not an exclusive franchise is granted.

A) Use the indicated price and total cost data to complete the following table

Hours of Price per Total Marginal Total Marginal
Care per Hour Revenue Revenue Cost Cost
Month

0 $22.50 $0.00
1 21.75 21.00
2 21.00 40.50
3 20.25 58.50
4 19.50 75.75
5 18.75 92.25
6 18.00 107.25
7 17.25 120.75
8 16.50 132.00
9 15.75 150.00
10 15.00 180.00

B) Determine price and level of service if competitive bidding results in a perfectly competitive price/output combination
C) Determine price and the level of service if the city grants a monopoly franchise

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