Monopoly Pricing: Understanding Different Management Criteria

Unit 9 AB224 | Microeconomics
Unit 9 Assignment:Monopoly Pricing
Name:
Course Number and Section:AB224–0X
Date:
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Assignment
In this Assignment, you will demonstrateyour 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.
Questions
1. The Gulf Sea Turtle Conservation Group (GSTCG), a 501(c) (3) 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 is $6.58. In a GSTCG member meeting, the video plan was
discussed. Table 1. shows 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.
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Unit 9 AB224 | Microeconomics
Table 1.
Suggested
Donation per
DVD Request
Anticipated
Number of DVD
Requests
$19.00 0
$15.00 2
$9.50 4
$7.75 10
$3.00 15
$0.00 20
a. Complete Table 2. by computing the Total Revenue, Marginal Revenue, and Profit
columns.
Table 2.
Suggested
Donation per
DVD Request
Anticipated
Number of DVD
Requests
Total
Revenue
Marginal
Revenue PROFIT
$19.00 0 0 0
$15.00 2 30 15 16.84
$9.50 4 38 4 11.68
$7.75 10 77.5 6.58 11.7
$3.00 15 45 -6.5 -53.7
$0.00 20 0 -9 -131.6
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
answers.
It is apparent that the total revenue is maximized when donation requested per DVD is $ 7.75 and the
DVD is received by 10 people. For this combination, the total revenue is 77.5 which is the maximum
as evident from the table.
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Unit 9 AB224 | Microeconomics
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 answers.
Here the objective is to ensure that video is provided to the maximum number of people. As a result,
the price charged per DVD should be $0 since at this price 20 people would receive the DVD. If any
price except $ 0 is charged for the DVD, then the number of people who would ask for the DVD
would be lesser and hence the objective would not be achieved (Krugman & Wells, 2014).
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 answers.
Efficiency would be accomplished when the marginal revenue and marginal cost are equal. This is
made possible when the price is $ 7.75. This is because from the table it is evident that at this price
the MR is $ 6.58 which is the marginal cost also. Hence, the Treasurer would favor the price as $.7.75
per DVD at which donation level 10 people would be interested.
e. The Fund Raising Committee wants the DVD program to generate as much profit in
donations as possible. What price is the Fund Raising Committee favoring and how many
people will receive the DVD if this becomes the price of the suggested donation? Explain
your answers.
The objective of the Fund Raising Committee is to maximize profit which is achieved where there the
marginal revenue and marginal cost would be equal. It is apparent that this is achieved when price is
$ 7.75 per DVD and at which donation level 10 people would be interested.
2. A business has been created to provide needed services to its market. As the only provider of this
service, it functions as a monopoly, with the ability to set prices and having the entire market
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Unit 9 AB224 | Microeconomics
demand schedule as its demand curve. Because the monopoly is newly formed, there is no
government intervention into the monopoly’s pricing actions. Examine Diagram 2. and answer each
of the following questions with complete explanations:
a. What is quantity (a)and why is it important?
Quantity (a) refers to the quantity to be produced by the monopolist for profit maximization. This is
important so as to decide if the production needs to be enhanced, decreased or maintained.
b. What is the value at point (b) and why is it important?
The profit is maximizes when MR=MC. The intersection point when moved upwards leads to point
(b) The point (b) lies in the demand curve and would help the monopolist in determining the profit
maximizing price. This point is important as it enables determining of the consumer surplus.
c. What is the value at point (c) and why is it important?
Point (c) highlights the average total cost (ATC) for the quantity where the profit is maximized for
the monopolist. It is important as it would help in determination of the profit for the monopolist.
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