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Economics 2 Pages

Dynamic Competitive Equilibrium

Question

Dynamic Competitive Equilibrium. Wal-Mart and other movie DVD retailers, including online vendors like amazon.com, employ a two-step pricing policy. During the first six months following a theatrical release, movie DVD buyers are wiling to pay a premium for new releases. Total and marginal revenue relations for a typical newly released movie DVD are given by the following relations:

TR = $28Q - $0.0045Q2

MR = ∂TC/∂Q = $28 - $0.009Q

Total cost (TC) and marginal costs (MC) for production and distribution are:

TC = $4,500+ $3Q + $0.0005Q2

MC = ∂TC/∂Q = $3 + $0.001Q

where Q is in thousands of units (DVDs). Because units are in thousands, both total revenues and total costs are in thousand of dollars. Total costs include a normal profit.

A. Use the marginal revenue and marginal cost relations given above to calculate DVD output, price, and economic profits at the profit-maximizing activity level for new releases.

B. After six months, price-sensitive DVD buyers appear willing to pay no more than $6 per DVD. Calculate the equilibrium price-output activity level in this situation. Is this a stable equilibrium?

 

Chapter 12: Monopoly and Monopsony:

Monopoly versus Competitive Market Equilibrium. During recent years, MicroChips Corp. has enjoyed substantial economic profits derived from patents covering a wide range of inventions and innovations for microprocessors used in high-performance desktop computers. A recent introduction, the Penultimate, has proven especially profitable. Market demand and marginal revenue relations for the product are as follows:

P = $5,500 - $0.005Q

MR = ∂TR/∂Q = $5,500 - $0.01Q

Fixed costs are nil because research and development expenses have been fully amortized during previous periods. Average variable costs are constant at $4,500 per unit.

A. Calculate the profit-maximizing price/output combination and economic profits if MicroChips enjoys an effective monopoly because of patent protection.

B. Calculate the price/output combination and total economic profits that would result if competitors offer clones that make the market perfectly competitive.

Solution

Title: Dynamic Competitive Equilibrium
Length: 2 pages (550 Words)
Style: MLA

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Assignment

Dynamic Competitive Equilibrium

Solution A 

Set MR = MC to find the profit-maximizing activity level:

MR = MC

$28 - $0.009Q = $3 + $0.001Q

0.01Q = 25 Q = 2,500 (000)

P = TR/Q

= ($28Q - $0.0045Q 2)/Q

= $28 - $0.0045Q

= $28 - $0.0045(2,500)

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