A Firm with Market Power Faces the Demand Function Q

question 110

Essay

A firm with market power faces the demand function q = 1,000 - 100P. The firm's marginal cost function is MC(q) = 2 + 0.08q.
a. If the firm behaves as a single-price monopoly, what are its optimal price and output?
b. If the firm behaves as a single-price monopoly, what are consumer surplus, producer surplus, and total surplus?
c. If the firm establishes a block-pricing structure with two prices, what prices will the firm use to maximize producer surplus?
d. If the firm establishes a block-pricing structure with two prices and maximizes producer surplus, what are consumer surplus, producer surplus, and total surplus?

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Definitions:

Plowback Ratio

The proportion of earnings retained by a business, rather than distributed to its shareholders as dividends, to reinvest in the core business or to pay debt.

Dividend Policy Decision

The strategy that a company uses to determine the size and timing of its dividends payments to shareholders.

Capital Intensity Ratio

A financial metric that measures the amount of capital needed per dollar of revenue; used to evaluate the investment intensity of a business's operations.

Fixed Asset Turnover Ratio

A financial metric that measures how efficiently a company uses its fixed assets to generate sales, calculated by dividing net sales by average fixed assets.