Market Structure
Perfect Competition
1. Consider the following market demand and supply curves in a perfectly competitive
industry as Q = 25 – 0.5P, Q= 10 + 1.0P. Now consider a firm in the industry whose cost
function is C = 25- 2Q + 4Q2. Should this firm produce in the short run? If it produces
then in how much quantity should it produce?
Answer : The firm would produce 1.5 units in the short run and incur a loss of
Rs.16.The shut down condition has to be followed to solve this numerical.
2. The market for green vegetables is Perfectly competitive. Fresh ones is a firm in this market. The
long run cost function of the firm is given as LAC = 400-2Q + 0.05Q 2. Find the profit maximizing
output in the long run. Also verify whether LAC and LMC are equal at this point.
Answer – Q =20, LAC=LMC = 380
Monopoly
1. Demand curve of a monopolist is given by
P = 110-4Q
Marginal cost for the monopolist is constant and is equal to 10.
a. What are the profit-maximizing price and output?
b. If the industry is perfectly competitive, what would be the price and output?
Answer: a. Use marginalist principle to solve for Q and P. Q = 12.5 and P = 60
b. In case of perfectly competitive market , P( which is MR) = MC, solving this you get Q =
25. In case of perfect competitive market the output is always double of monopoly.
2. Cost function of a monopolist is TC = 1000 + 20Q.The demand function for the
monopolist is estimated to be P = 200 – 4Q.
a. Compute the profit maximizing output and the profit at that level of output for the
monopolist. Use MR=MC rule to solve the value of P and Q. Q =22.5 units, Profit =
1025
b. If the industry transforms into a duopoly, what would be the equilibrium output for the
industry? In case of duopoly the monopolist demand function would be shared
between the duopolist. Q = 30 units
3. ABC Company, which supplies power to households and industries, faces the following total
cost function. TC = 22000 + 100Q
The demand for power by the two clearly separable sets of consumers is given by the
following demand functions.
Household : P1 = 300 – 0.5Q1
Industries: P2 = 200 – 0.5 Q2
Required:
a. If price discrimination is not permitted, determine price charged by the company and
profit earned at that price.
Answer : Develop a combine demand function from both the demand function, that
would be total demand function of the industry. Then use MR=MC rule to solve for
Q and P and Profit. Q =300,P =175 and profit = 500
b. If price discrimination is legalized, determine the price charged by the company and the
profit earned at that price.
Answer: calculate P and Q separately for both the market using MR -= MC rule.
And then calculate the profit. Profit = 3000
4. The demand equation of local movie theater in Kolkata for balcony seats and dress
circle seats are given respectively as: Qb = 60 – 2Pb and 3Qdc = 56- Pdc. The total cost
of running show by multiplex is TC = 40 + 20Q. What would be the price of tickets with
price discrimination? What would be the price of multiplex decides to charge the same
price across both the types of seats.
Answer : With price discrimination Pb = 25, Pdc = 38
Without price discrimination: Pdc = 26.9
Oligopoly
1. In a duopoly, the industry demand function is P =100 – 0.5 Q
Cost functions of the two firms are:
C1- 5Q1, C2 = 0.5Q22
a. What is the output and price in duopoly?
Solve for Q1 using MR1=MC1 and Q2 by using MR2 =MC2. Q1= 80,Q2 =30
b. What are the profits earned by each firm?
Calculate based on P1 ans Q1 value.
2. Suppose that the market demand function for a two firm equal market-sharing cartel is,Q =
120-10P and that the total cost function of each duopolist is,TC = 0.1 Q2. Determine the best
level of output of each duopolist, the price at which each will sell the commodity and the total
profits of each.
Answer :The half share market faced by each duopolist is Q = 60-5P, or P = 12-0.2Q
TR = PQ = (12- 0.2Q) Q = 12Q – 0.2Q2 And MR = d (TR)/dQ = 12-0.4Q
The marginal and average total cost of each duopolist is
MC = d (TC)/dQ = 0.2Q And ATC = TC/Q = 0.1Q2/Q = 0.1 Q
Setting MC =MR, we get 0.2 Q = 12-0.4Q, or, 0.6Q = 12,or, Q = 20
P = 12-0.2(20) = 8 Therefore, TR = 12(20) – 0.2(20) 2 = 240-80 = 160
And = TR –TC = 160 – 0.1(20) 2 = 160-40 = 120
Monopolistic
1. A firm operating in a monopolistically competitive market faces the following demand
function
P = 8000- 4Q
LAC = 8000 – 7Q + 0.002Q2
a. Find profit maximizing price and output for the firm? What is the profit at this output?
In monopolistic Competition, optimum output when LAC is Minimum. Solve P,Q
and Profit based on that. So Q = 1500
b. Is the industry in equilibrium? Why or Why not?
Answer - In case of monopolistic market, long run equilibrium happens when all
firm getting normal profit. So based on the profit calculated in previous point, you
can judge whether industry is in equilibrium or not.
