This competency assessment assesses the following Outcome:
BU224M4-4: Examine how the behavior of a firm changes when it operates in monopolistic, oligopolistic, and monopolistically competitive market environments.
In this assessment, you will demonstrate your understanding of monopoly pricing, based on different management criteria, the impact of price regulation of monopolies, and provide detailed explanations of how price effect and quantity effect cause marginal revenue to be different from the price.
Directions:
Using the Word template provided in the Minimum Submission Requirements, answer the following questions based on the situation.
Questions
1. The Gulf Sea Turtle Conservation Group (GSTCG), a non-profit group of volunteers working to collect data on nesting sea turtles and to promote sea turtle conservation, is considering creating a video to educate people about sea turtle conservation. The cost of duplicating the video on a DVD and mailing the DVD to anyone is $5.56. In a GSTCG member meeting, the video plan was discussed. The first two columns of Table 1 show the expected demand for the DVD at different suggested donation levels, and they can act as a single-price monopolist if they choose to. The receipts will be used to fund GSTCG supplies for their data collection and conservation work. At the end of each sea turtle nesting season, any excess funds are donated by the GSTCG to a local non-profit sea turtle research and rehabilitation facility.
a. Complete Table 1 by computing the Total Revenue, Marginal Revenue, Total Cost, and Profit columns, each rounded to two decimal places. The cost of duplicating a video on a DVD and mailing the DVD, the Marginal Cost, is $5.56.
Table 1
Suggested Donation per DVD Request
Anticipated Number of DVD Requests
Total Revenue
Marginal Revenue
Total Cost
Profit
$19.00
0
$15.00
2
$9.50
5
$7.75
9
$3.00
15
$0.00
24
b. The president wants the GSTCG to provide videos to generate the most possible donations (Total Revenue). What price is the president of the GSTCG favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answer.
c. The Education Outreach Committee wants the GSTCG to provide videos to the most possible number of people. What price is the Educational Outreach Committee favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answer.
d. The treasurer of the GSTCG wants the DVD program to be as efficient as possible so that the marginal revenue equals marginal cost. What price is the treasurer favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answer.
e. The Fundraising Committee wants the DVD program to generate as much profit in donations as possible. What price is the Fundraising Committee favoring and how many people will receive the DVD if this becomes the price of the suggested donation? Explain your answer.
2. Imagine an island a short distance off the east coast of a country. This island is called Onus, and it has a population of about 500 residents. Their only way to the mainland is by the ONE ferry boat that runs between Onus and the mainland (the ferry operates as a monopoly).
Similarly, a short distance off the west coast of the same country is another island, Yuri, with a similar population of about 500 residents. Yuri, however, is a tourist attraction. There are MANY ferry boats running between Yuri and the mainland (each ferry operating in this perfectly competitive market). Each Yuri ferry operator provides service to both the tourists and to the 500 west coast island residents.
Using the information that you learned in Chapter 13 of the text, answer the following questions by comparing and contrasting the differences between the monopoly market in Onus and the perfectly competitive market in Yuri.
Explain in detail what differences in demand that the monopoly ferry operator on the east coast island of Onus will experience compared to the demand that a single ferry operator will experience in the perfectly competitive west coast market of Yuri.
(Description: A graph with Quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Monopoly. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. Beginning in the upper left corner of the graph is a solid black line that descends at roughly a 45 degree line to the right. Each end of the solid black line is labeled D with a dark circles around the labels. Again, starting at the upper left corner and descending sharply to the right is a dashed straight black line that has the label MR at the lower end of the line.)
(Description: A graph with quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Firm in a Perfectly Competitive Market. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. At the point where the blue curve crosses the green curve is a black solid horizontal line is labeled D on both ends and has dark circles around the labels. )
Both the Onus ferry operator in the monopoly market and each of the Yuri ferry operators in the perfectly competitive market will want to produce at the point that the marginal revenue is equal to the marginal cost. Explain in detail the two reasons that the monopolys marginal revenue will always be less than its price while the marginal revenue in the perfectly competitive market will always be equal to the market price.
(Description: A graph with quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Monopoly. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. Beginning in the upper left corner of the graph is a solid black line that descends at roughly a 45 degree line to the right. Each end of the solid black line is labeled D with a dark circle around the lower label. Again, starting at the upper left corner and descending sharply to the right is a dashed straight black line that has the label MR and a dark circle around the label at the lower end of the line. Between the two dark circled labels is a label that reads MR not equal D.)
(Description: A graph with Quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Firm in a Perfectly Competitive Market in Which the Equilibrium Price Is Equal to The Firms Lowest ATC. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. At the point where the blue curve crosses the green curve is a black solid horizontal line is labeled D on the right side and D & MR on the left side.)
Explain in detail how the monopoly ferry operator will determine the quantity of ferry service that she will provide to the 500 residents of Onus. Also explain how that monopoly quantity will compare to the total quantity of ferry service available to the 500 residents of the perfectly competitive market of Yuri by ALL the Yuri ferry providers.
(Description: A graph with quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Monopoly No Government Intervention. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve starts above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. Beginning in the upper left corner of the graph is a solid black line that descends at roughly a 45 degree line to the right. Each end of the solid black line is labeled D. Again, starting at the upper left corner and descending sharply to the right is a dashed straight black line that has the label MR. At the point where the green MC curve crosses the black dashed MR line is a gray circle labeled A. Extending up and down from the label A is a gray dotted line. The lower end of the gray dotted line ends in a circle with the label B. The dotted line extending upward from A ends at the Black solid line and has a circle labeled C. Extending to the left from the C label is another dotted gray line that extends horizontally until it intersects the vertical axis. Where the vertical dotted line crosses the blue ATC curve, a thin solid line extends horizontally to the vertical axis. The area bounded by this horizontal solid line, the vertical axis, the horizontal gray dotted line the part of the vertical dotted gray line extending down from the C label to the this solid line is shaded light gray and contains a circled label D.)
(Description: A graph with quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Firm in a Perfectly Competitive Market in Which the Equilibrium Price Is Equal to The Firms Lowest ATC. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. At the point where the blue curve crosses the green curve is a black solid horizontal line is labeled D on the right side and D & MR on the left side.)
Explain in detail how the monopoly ferry operator in Onus will determine the price she will charge the island residents for ferry service and how that price will differ from the price experienced by the island residents and tourists in the perfectly competitive market of Yuri.
(Description: A graph with quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Monopoly No Government Intervention. Midway up the graph, on the left side is a red descending curve labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve starts above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. Beginning in the upper left corner of the graph is a solid black line that descends at roughly a 45 degree line to the right. Each end of the solid black line is labeled D. Again, starting at the upper left corner and descending sharply to the right is a dashed straight black line that has the label MR. At the point where the green MC curve crosses the black dashed MR line is a gray circle labeled A.. Extending up and down from the label A is a gray dotted line. The lower end of the gray dotted line ends at the horizontal axis in a circle with the label B. The dotted line extending upward from A ends at the Black solid line and has a circle labeled C. Extending to the left from the C label is another dotted gray line that extends horizontally until it intersects the vertical axis. Where the vertical dotted line crosses the blue ATC curve, a thin solid line extends horizontally to the vertical axis. The rectangular area bounded by this horizontal solid line, the vertical axis, the horizontal gray dotted line, and the part of the vertical dotted gray line extending down from the C label to the solid line is shaded light gray and contains a circled label D.)
(Description: A graph with Quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Firm in a Perfectly Competitive Market in Which the Equilibrium Price Is Equal to The Firms Lowest ATC. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. At the point where the blue curve crosses the green curve is a black solid horizontal line is labeled D on the right side and D and MR on the left side.)
3. Onus residents, in questions 2.a.d. above, complain to their local politicians about the high prices. In an attempt to reduce the exorbitant price that the residents must pay for ferry service to and from the mainland, the local politicians convince the legislature to create a regulatory board which will impose a legal price ceiling on the Onus monopoly ferry operator.
In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be below the ferry operators lowest ATC, but well above its lowest AVC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operators profits and continued ability to provide service to the inhabitants of the island of Onus.
(Description: A graph with Quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Monopoly Government Price Ceiling Set below Lowest ATC, but above Lowest AVC. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. Beginning in the upper left corner of the graph is a solid black line that descends at roughly a 45 degree line to the right. Each end of the solid black line is labeled D. Again, starting at the upper left corner and descending sharply to the right is a dashed straight black line that has the label MR. At a point below the blue ATC curve is a gray dotted horizontal line extending from the vertical axis to the right across the graph. Near the right end is a gray labeled box with an arrow pointing to the gray dotted line and labeled Price Ceiling. At the point where the green MC curve crosses the black dashed MR line is a gray circle labeled A. Extending up and down from the label A is a gray dotted line. The lower end of the gray dotted line ends at the horizontal axis in a circle with the label B. The dotted line extending upward from A ends at the gray dotted horizontal line labeled Price Ceiling. Extending to the left from where the vertical dotted gray line stopped is another dotted gray line that extends horizontally until it intersects the vertical axis. Where the vertical dotted line crosses the purple AVC curve, a thin solid line extends horizontally to the vertical axis. The area bounded by this horizontal solid line, the vertical axis, the horizontal gray dotted line, and the part of the vertical dotted gray line extending down to the purple AVC curve at the solid line is shaded light gray and contains a circle labeled C.)
In this scenario, the regulatory board imposed a price ceiling on the Onus monopoly ferry operator that was calculated to be well above the ferry owners lowest AVC and equal to the ferry owners lowest ATC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operators profits and continued ability to provide service to the inhabitants of the island of Onus.
(Description: A graph with quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Monopoly Government Price Ceiling Set at Lowest ATC. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. Beginning in the upper left corner of the graph is a solid black line that descends at roughly a 45 degree line to the right. Each end of the solid black line is labeled D. Again, starting at the upper left corner and descending sharply to the right is a dashed straight black line that has the label MR. At the lowest point on the ATC curve is a gray dotted horizontal line extending from the vertical axis to the right across the graph. Near the right end is a gray labeled box with an arrow pointing to the gray dotted line and labeled Price Ceiling. At the point where the green MC curve crosses the black dashed MR line is a gray circle labeled A. Extending up and down from the label A is a gray dotted line. The lower end of the gray dotted line ends at the horizontal axis in a circle with the label B. The dotted line extending upward from A ends at the gray dotted horizontal line labeled Price Ceiling. Extending to the left from where the vertical dotted gray line stopped is another dotted gray line that extends horizontally until it intersects the vertical axis. Where the vertical dotted line crosses the purple AVC curve, a thin solid line extends horizontally to the vertical axis. The area bounded by this horizontal solid line, the vertical axis, the horizontal gray dotted line, and the part of the vertical dotted gray line extending down to the purple AVC curve at the solid line is shaded light gray and contains a circle labeled C.)
In this scenario, the regulatory board, imposed a price ceiling on the Onus ferry operator that was calculated to be well above the ferry owners lowest AVC and well above the ferry owners lowest ATC. Explain in significant detail, what will be the short run and long run impacts of such a price ceiling on the Onus monopoly ferry operators profits and continued ability to provide service to the inhabitants of the east coast island of Onus.
(Description: A graph with quantity along the horizontal axis and dollar amounts representing price along the vertical axis, is entitled Monopoly Government Price Ceiling Set above Lowest ATC. Midway up the graph, on the left side is a red descending curve is labeled AFC. Starting below the red curve is a purple curve with a slight descent and then has a slight rise to the right, crossing the red curve, and is labeled AVC. A green curve, starts between the purple curve and the red curve, descends and touches the purple curve, then rises sharply, crossing the red curve and is labeled MC. A blue curve start above the red curve, then descends sharply to a point from which it begins a gradual rise to the right, and crosses the sharply rising green curve, and is labeled ATC. Beginning in the upper left corner of the graph is a solid black line that descends at roughly a 45 degree line to the right. Each end of the solid black line is labeled D. Again, starting at the upper left corner and descending sharply to the right is a dashed straight black line that has the label MR. At a point above the lowest point on the ATC curve is a gray dotted horizontal line extending from the vertical axis to the right across the graph. Near the right end is a gray labeled box with an arrow pointing to the gray dotted line and labeled Price Ceiling. At the point where the green MC curve crosses the black dashed MR line is a gray circle labeled A. Extending up and down from the label A is a gray dotted line. The lower end of the gray dotted line ends at the horizontal axis in a circle with the label B. The dotted line extending upward from A ends at the gray dotted horizontal line labeled Price Ceiling and contains a circle labeled C. Extending to the left from where the vertical dotted gray line stopped is another dotted gray line that extends horizontally until it intersects the vertical axis. Where the vertical dotted line crosses the blue ATC curve, a thin solid line extends horizontally to the vertical axis. The rectangular area bounded by this horizontal solid line, the vertical axis, the horizontal gray dotted line, and the part of the vertical dotted gray line extending down to the blue ATC curve at the solid line is shaded light gray and contains a circle labeled D.)
4. Dr. Fine and Dr. Feelgood are the only two medical doctors offering immediate walk-in medical services in a small rural town. They operate in a two firm oligopoly. Each doctor can charge either a high price or a low price for a standard medical visit. Figure 1 shows their possible profits, based on each doctors pricing strategy.
Figure 1
(Description: A rectangular depiction with Dr. Feelgood across the top and below are to column headings, the left is Low price and the right is High price. On the far left of the image, written vertically is Dr. Fine and to the right are two rows. The top row is labeled Low price and the bottom row is labeled High price. The two columns and two rows make a four by four grid. Each grid has two triangles. The upper triangles for Dr. Feelgood are purple, and the lower triangles for Dr. Fine are orange.
– The upper triangle for Dr. Feelgood in row Low price and column Low price contain the value of $35 profit.
– The upper triangle for Dr. Feelgood in row Low price and column High price contain the value of $0 profit.
– The lower triangle for Dr. Fine in row Low price and column Low price contain the value of $35 profit.
– The lower triangle for Dr. Fine in row Low price and column High price contain the value of $45 profit.
– The upper triangle for Dr. Feelgood in row High price and column Low price contain the value of $45 profit.
– The upper triangle for Dr. Feelgood in row High price and column High price contain the value of $38 profit.
– The lower triangle for Dr. Fine in row High price and column Low price contain the value of $0 profit.
– The upper triangle for Dr. Fine in row High price and column High price contain the value of $38 profit.)
a. Using the information in Question 4 and Figure 1 above, explain why the Nash Noncooperative Equilibrium pricing strategy is the safest choice when there is only a single period in which to choose a price and the likely actions of the competitor are unknown.
b. Using the information in Question 4 and Figure 1 above, complete the following table to depict the two period pricing situation when Dr. Fine always plays Tit-for-Tat and Dr. Feelgood always plays Tit-for-Tat.
FIRST Period
Payoffs
SECOND Period
Payoffs
TOTAL Payoffs
Charges
(high or low)
Charges
(high or low)
Fine
Fine
Feelgood
Feelgood
c. Using the information in Question 4 and Figure 1 above, complete the following table to depict the two period pricing situation when Dr. Feelgood always plays Tit-for-Tat and Dr. Fine always chooses the Low price.
FIRST Period
Payoffs
SECOND Period
Payoffs
TOTAL Payoffs
Charges
(high or low)
Charges
(high or low)
Fine
Fine
Feelgood
Feelgood
d. Using the information in Question 4 and Figure 1 above, complete the following table to depict the two period pricing situation when Dr. Feelgood always chooses the Low price and Dr. Fine always chooses the Low price.
FIRST Period
Payoffs
SECOND Period
Payoffs
TOTAL Payoffs
Charges
(high or low)
Charges
(high or low)
Fine
Fine
Feelgood
Feelgood
e. Using the information in Question 4 and Figure 1 above, complete the following table to depict the two period pricing situation when Dr. Fine always plays Tit-for-Tat and Dr. Feelgood always chooses the Low price.
FIRST Period
Payoffs
SECOND Period
Payoffs
TOTAL Payoffs
Charges
(high or low)
Charges
(high or low)
Fine
Fine
Feelgood
Feelgood
