Problem 2: Bertrand Or Monopoly?
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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
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