SELECTED ANSWERS to Chapter 14:

4.  Monopolies produce less than the economically efficient quantity because MR < P for a monopolist, and (like all sellers) a monopolist chooses a quantity at which MR=MC.  As a result, the monopoly produces a quantity at which MC < P, i.e. marginal cost is less than price.  Since MC measures the cost of producing an additional unit of the good (beyond what the monopoly actually produces and sells), and P measures the value that some consumer would be willing to pay for it, monopolies choose not to produce goods that customers would value at more than their cost of production.  As a result, monopolies cause economic inefficiency.

7.  It is economically efficient to have ONE producer in that case, but not to have a monopoly seller who chooses a quantity at which price exceeds marginal cost.

9.  Each member of the cartel benefits by cheating (selling more) because its marginal revenue exceeds marginal cost if the OTHER firms reduce production to keep the price high.  (Think of the studying example on page 336, or the classroom experiment box on that page.)

13.  Zero.   If a monopolist perfectly price discriminates, then as long as a buyer is willing to pay more than the marginal cost of production, the momopolist produces and sells that unit.  In other words, the monopoly gets all the gains from trade as its profit if it perfectly price discriminates -- so it has an incentive to carry out all trades that create such gains.  Consequently, it produces and sells the economically efficient quantity.

14.  People spend time and resources trying to get government favors (flying to Washington, dining with Senators, etc.) instead of producing goods and services that consumers want.

16. (a) Rebecca will choose a quantity to equate MR with MC.  Her MC is $1 per gallon, so she will produce a quantity at which MR = $1.  To calculate MR, first multiply price by quantity to create a TR (total revenue) column in the table -- it will read ($7, $12, $15, $16, $15, $12, $7, $4).  Then use that column to create a MR column -- it will read ($7, $5, $3, $1, -$1, -$3, -$5, -$3).  MR = $1 when she produces 4 gallons.  The highest price at which she can sell 4 gallons is $4 per gallon.
(b) She will earn $16 total revenue and have $12 in profit after her $4 total cost.
(c) Consumers will get consumer surplus from her lemonade of $3+$2+$1+$0 = $6.
(d) She can produce lemonade for $1 per gallon.  People are willing to pay $3 and $2 for 5th and 6th gallons (that she chooses NOT to produce).  So she creates a deadweight social loss of $2+$1 = $3.
(e) If she can perfectly price discriminate, then she will produce 7 gallons, charging $7 for one gallon, $6 for another gallon, ...., $2 for another gallon, and $1 for another gallon.  She will earn a profit of $6+$5+$4+$3+$2+$1+$0 = $21.  Her customers get zero consumer surplus.  She causes no deadweight social loss in this case.

17. Colleges are price discriminating -- giving discounts (scholarships) to people who would not pay such high prices, and charging higher prices (no scholarships) to students with financial aid from the outside.

19. False.  Roughly, if you make a product that lasts twice as long, people will be willing to pay (about) twice as high a price for it.  ("About" because they may prefer not to keep the product for a long time, because it may go out of style or be replaced by better alternative products.)  The main point is that sellers do NOT have any incentive to make products that fall apart quickly -- in order to try to sell more after those fall apart -- because buyers would not pay as much for those products.

21.  (a) Suppose EVERY customer at the park buys exactly one hamburger and one drink, in addition to the admission ticket to the park.  In that case customers would care ONLY about the TOTAL cost of the ticket, the burger, and the drink.  They would NOT care about whether one item cost a lot and another item had a low price -- because (by assumption) they are all buying one of each.  In this case, the park maximizes its profit by choosing a TOTAL price of tickets, burgers, and drinks.  The composition of the prices does not matter.  If the park reduced food prices, it could charge more for tickets, and if it raised food prices, it would want to charge less for tickets to keep the TOTAL price at the profit-maximizing level.

(b) When some people are willing to pay more than others for food at the park, the park can price discriminate among customers.  People who are willing to pay higher prices (i.e. people with more inelastic demands) will be willing to pay a high price for food.  Other customers (with more elastic demands) will come to the park -- but not buy food.  Those customers come to the park because the cost of admission is low -- they may not come to the park at all if the admission ticket price were higher.