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Comparing Supply-Demand Equilibrium: Competition vs Monopoly

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The widget industry is perfectly competitive. The industry demand and supply functions for widgets are given below.
Qd = 424 - 40P
Qs = 40 + 8P
What is the equilibrium price and quantity for the industry?
If the government establishes a price floor of $9, explain what will result in terms of excess demand or supply.
If the government establishes a price ceiling of $6, explain what will result in terms of excess demand or supply.
Assume the supply curve shifts to
Qs' = 34 + 12P
What is the new equilibrium price and quantity?
Assume in addition to the supply curve shifting, the demand curve shifts to

Qd' = 484 - 38P

What happens to equilibrium price and output?

Below is a table with total data for a firm in a perfectly competitive industry.

Quantity Total Cost
0 100
10 220
15 300
20 360
25 450
30 600
35 770
40 960

What is the marginal cost and average total cost for the firm at each level of output?
If the prevailing market price is $34 per unit, how many units will be produced and sold? What are the profits per unit? What are total profits?
Is the industry in long run equilibrium at this price? If not, what do you expect to happen to price over time?

Jones Company operates within a monopolistically competitive industry. The estimated demand for its products is given by the following inverse demand function
P = 1760 - 12Q
It finance department has estimated its total cost function as
TC = 24,000 + 5 Q - 15 Q2 + 0.333 Q3
What is the level of output that maximizes short run profits?
What is the profit maximizing price?
What are total profits?
What is the effect of an increase in fixed costs of $5000 on equilibrium price and output?

Smith Corp. has determined that its contribution margin, (P - MC)/P, is 40%. A recent market research study found the following relationship between adverting outlays and sales revenue.

Advertising Outlays Gross Revenues from Sales
$500,000 $4,000,000
$600,000 $4,500,000
$700,000 $4,900,000
$800,000 $5,200,000
$900,000 $5,420,000
$1,000,000 $5,600,000

What is the contribution to profits from increasing advertising sales by $1 if Smith Corp. is currently spending between $500,000 and $600,000 on advertising?
What is the profit maximizing level of advertising? Explain.

Ajax, Inc. is a monopolist. The estimated demand function for its product is

Qd = 120 - 0.8P + 12Y + 4A

Where Qd denotes quantity demanded, P denotes price, Y denotes personal income (in thousands of dollars), and A denotes advertising expenditures in hundreds of dollars.

Ajax's marginal cost function is given as

MC = 21 + 4Q

Assume Y equals 3 and A equals 3 and fixed costs equal $1000

What is the inverse demand function? (The equation demand equation in the form
P = a - bQd)?
What is the profit maximizing price and quantity of output for Ajax, assuming it is an unregulated monopoly? What are its profits?
If fixed costs increase to $1200, what will happen to equilibrium price and quantity?

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The Solution solves for equilibrium in a perfect competition vs a monopoly.

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  • MBA, Merage School of Business, Univ of Cal, Irvine
  • BA, Univ of Cal, Irvine
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