The Baldonian shoe market is served by a monopoly firm. The demand for shoes in
ID: 1194864 • Letter: T
Question
The Baldonian shoe market is served by a monopoly firm. The demand for shoes in Baldonia is given by Q = 10 - P, where Q is millions of pairs of shoes (a right shoe and left shoe) per year, and P is the price of a pair of shoes. The marginal cost of making shoes is constant and equal to $2 per pair. At what price would the Baldonian monopolist sell shoes? How many shoes arc purchased? Baldonian authorities have concluded that the shoe sellers monopoly power is not a good thing. Inspired by the U.S. government's attempt several years ago to break Microsoft into two pieces, Baldonia creates two firms: one that sells right shoes and the other that sells left shoes. Let p1 be the price charged by the right-shoe producer and P1 be the price charged by the lefl-shoc producer. Of course, consumers still want to buy a pair of shoes (a right one and a left one), so the demand for pairs of shoes continues to be 10 - P1 - P2. If you think about it, this means that the right-shoe producer sells 10 - P1 - P2 right shoes, while the lcfl-shoc producer sells 10 - P1 - P2 left shoes. Since the marginal cost of a pair of shoes is S2 per pair, the marginal cost of the right-shoe producer is $1 per shoe, and the marginal cost of the left-shoc producer is $1 per shoe.Derive the reaction function of the right-shoe producer (PI in terms of P2). Do the same for the left-shoe producer. What is the Bertrand equilibrium price of shoes? How many pairs of shoes arc purchased? Has the breakup of the shoe monopolist improved consumer welfare? To see the potential relevance of this problem to the Microsoft antitrust case, you might be interested in reading Paul Kingman, "The Parable of Baron von Gates," New York Times (April 26, 2000).Explanation / Answer
The demand function for the shoes is Q = 10 - P
Answer to Question (a):
The seller in a competitive market cannot sell the commodity more than the marginal cost of tge commodity as this would take away his customers to the competitors and make him exit the market over the period. The monopolist however does not have the fear of competition being the only seller in the market . The monopolist in the Baldonian shoe market will sell the shoes at a price more than $2 which is the marginal cost. The firm will thus earn an additional monopoly profit over and above the normal profit.
Now assuming the monopolist sells the shoes at $2, number of shoes sold would be:
Q = 10 - P
Q= 10 - 2 = 8 shoes
If monopolist sells at a price more than the marginal cost of $2, he will sell the following quantity:
Q = 10 - P
Q = 10 - 3 = 10 - 3 = 7 shoes.
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