1.) Firm XYZ is a monopoly. The firm sells its product in a market where the mar

Question

1.) Firm XYZ is a monopoly. The firm sells its product in a market where the market demand for the firms product is: Q^D = 20-2xP, where Q^D = quantity demand $P = the selling price of the product.

Currently the firm sells its product charging $3.00 per unit. You are just hired by the firm and the firms president asked you to evaluate the firms current pricing policy. Your job is to write a full report for the firms pricing policy and recommend any changes you might think are necessary. Explain your answer.

2.) A. State and briefly explain the fundamental steps of the decision making process the firms decision-maker must follow in order to achieve the firms objective(s).

B. Explain why the price of the product which is sold in a competitive market settles down at the equilibrium intersection of the Law of Demand and the Law of Supply. Explain what happens if the market price of the product starts out too high or too low. Provide a numerical example to support your explanation.

3.) Consider an open, free and competitive market in which a product can be reproduced is bought and sold. Explain why in this type of a market the selling price of the product converges to the unit cost of the product so that no firm that sells this product earns more than the normal rate of proft. Explain your reasoning carefully and use graphs and numbers that you consider necessary to support your analysis.

4.) Use well-thought numerical examples to prove the following propositions:

A: If the production transformation process is subject to constant returns to scale, then the long-run average total cost is constant

B: If the production transformation process is subject to DECREASING returns to scale, then the long-run average total cost is INCREASING as more output is produced.

C: If the production transformation process is subject to INCREASING returns to scale, then the long-run average total cost is DECREASING as more output is produced.

Explanation / Answer

1) In case of a monopoly the aim will always be profit maximization. The firm must thus first determine the cost function and then deternine the marginal cost. The firm will thus maximize profits subject to the quantity of the firm. The firm will optimize where the marginal revenue is equal to the marginal cost for the firm. In this case if we assume away costs then the problem becomes a revenue maximization problem. Thus here we get the optimal quantity as 10 and the optimal price is thus $5. The firm will thus benefit from charging a higher price as compared to $3.

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