Barber Ltd
Barber Ltd
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Monopoly Price/Output Decision (WTF help)?
The Barber Shop, Ltd., has a monopoly in the Pittsburgh market because of restrictive licensing requirements, and not because of superior operating efficiency. As a monopoly, the Barber Shop provides all industry output. For simplicity, assume that the Barber Shop operates a chain of salons and that each shop has an average cost minimizing activity level of 750 hair styling per month, with Marginal Cost = Average Total Cost = $20 per styling.
Assume that demand and marginal revenue curves for hair styling in the College Park market are
P=$80 - $0.0008Q
MR = $80 - $0.0016Q
Where P is price per unit, MR is marginal revenue, and Q is total firm output (styling).
A.Calculate the competitive market long-run equilibrium activity level, and the monopoly profit maximizing price/output combination.
B.Calculate monopoly profits, and discuss the monopoly problem@ from a social perspective in this instance.
A) In a competitive market, price (P) equals marginal cost (MC). Marginal cost is given at $20 per styling. The problem states that Barber Shop does NOT have superior operating efficiency, so we can assume that this would be the Marginal cost, and therefore the price, of all styling salons in the absence of the restrictive licensing requirements. For free market quantity, use the demand equation:
P=80-.0008Q
P=20, so Q=75,000
Monopoly output maximizes revenue without competition, and is found where marginal revenue equals zero. (If this doesn't make sense, just consider that in a free market, firms can drop their prices, get a larger market share, and make more money -- until price drops below the cost of making an additional product. A monopoly already has the entire market, so it doesn't have an incentive to drop the price.)
So,
MR=80-.0016Q=0
Q=50,000
Price is given by the demand curve:
P=80-.0008Q=40
B) Monopoly profits are given by quantity multiplied by revenue(R) minus cost.
R=PQ=2,000,000
C=20Q=1,000,000
Monopoly profit=2,000,000-1,000,000=1,000,000
I'm leaving the social problem for you to decide, but keep these points in mind:
- The monopoly is making a million bucks in economic profit, where free market firms would make none.
- We know that The Barber Shop has a whole bunch of little salons (each salon only does 750 stylings a month), yet there are no little indepentent guys because they can't get permits.
- If competitors could get in, they could rice lower than The Barber Shop and get a larger market share.
Please double check my math! Good luck and good night!
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