Problem 2: Bertrand Or Monopoly?

Problem 2: Bertrand or Monopoly? How can you tell?

After your time in Collegeville, you move on to Adultville – a much bigger town. You are again the economic advisor to the mayor of Adultville. You see that in Adultville there is only one firm selling widgets, and that

Q = 25, P= 20, and ϵ = −2.

You also know (from your predecessor) that demand is linear,

Q = A − BP,

and that the technology for producing widgets in Adultville is linear, or that marginal costs are constant,

mc = c.

Also, there are no other costs of production, such as licensing fees. You are naturally concerned!

Part 1: Suppose you believe that the widgets seller is a monopolist. What is her markup? Specifically, what is P − mc?

Part 2: Suppose you believe that the widgets seller is a Bertrand competitor. Can you say something about the seller’s markup (P – mc)?

a. No, this gives no information on her markup

b. Yes, her markup is at least $6

c. Yes, her markup is $0

d. Yes, her markup is at most $12

e. Yes, her markup is at most $20

f. Yes, her markup is $10

Problem 2: Bertrand or Monopoly? How can you tell?

After your time in Collegeville, you move on to Adultville – a much bigger town. You are again the economic advisor to the mayor of Adultville. You see that in Adultville there is only one firm selling widgets, and that

Q = 25, P= 20, and ϵ = −2.

You also know (from your predecessor) that demand is linear,

Q = A − BP,

and that the technology for producing widgets in Adultville is linear, or that marginal costs are constant,

mc = c.

Also, there are no other costs of production, such as licensing fees. You are naturally concerned!

Part 1: Suppose you believe that the widgets seller is a monopolist. What is her markup? Specifically, what is P − mc?

Part 2: Suppose you believe that the widgets seller is a Bertrand competitor. Can you say something about the seller’s markup (P – mc)?

a. No, this gives no information on her markup

b. Yes, her markup is at least $6

c. Yes, her markup is $0

d. Yes, her markup is at most $12

e. Yes, her markup is at most $20

f. Yes, her markup is $10