TOPIC 9 EXERCISES AND ANSWERS

Exercise 1

A CAMRAI, a Monopoly, serves two types of customers First Class (F1) and Economic
Class (EC). CAMRAIL has a joint total cost function

TC = 10Q1 + Q1Q2 + 10Q2

Where Q1 and Q2 denote the quantities of F1 and EC respectively. If P1 and P2 denote the
corresponding prices then the demand equation are

P1 = 50 − Q1 + Q2
P2 = 30 + 2Q1 − Q2

Find the maximum profit if the CAMRAIL is contracted to operate a total of 15 seats of
either type. Estimate the new optimal profit if the operation quota rises by 1 seat.
Use the Lagrange multiplier method to solve the above problem.

Exercise 2

Assume the demand curve for CAMRAIL service for the Yaounde – Douala Route is

1
Q = 200 - P
4

where Q is the number of passengers requesting the related service and P is its price.
Suppose the total cost, TC, curve associated with the Yaounde – Douala Route operation
is TC = 80Q

Assuming the market is perfectly competitive.

a) Determine the equilibrium values of passengers and price.

b) Compute the corresponding profit,  C .
c) Compute the consumer surplus, CSC.

Now assume the market of CAMRAIL is monopolised.

d) Determine the monopolist’s profit maximising levels of the number of passengers

and price.
e) Compute the monopolist’s profit,  M .
f) Compute the consumer surplus, CSM in his case.
g) Compare the consumer surplus when CAMRAIL operate in a perfect competitive
market and a monopolistic maket.

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Exercise 3

The Taxi industry is perfectly competitive, and each producer has a long-run marginal cost
function given by

MC (Q ) = 40 − 12Q + Q 2

The corresponding long-run average cost function is

1
AC (Q ) = 40 − 6Q + Q 2
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The market demand curve for passengers is

D( P) = 2200 − 100P

a) What is the long-run equilibrium price in this industry?

b) At this price how many passengers would an individual Transport company serve
(we assume that taxis belong to self-employed individuals, therefore to a Transport
company?
c) How many Transport companies are in the Taxi market in a long-run competitive
equilibrium?
d) Suppose the demand curve shifted so that it is now.

D ( P ) = A − 100P

How large would A have to be so that in the new long run competitive equilibrium, the
number of taxi companies was twice what it was in the initial long-run equilibrium?

Exercise 4

Suppose that CAMER-CO has a monopoly on direct flight service from Yaounde to
Douala. The demand curve during the summer is P = 2600 -5Q, where P is the price of a
ticket in dollars and Q is the number of tickets sold each day. The demand for tickets the
rest of the year is P = 2000 - 5Q. The marginal cost of an additional passenger, regardless
of the season, is $200.

a) Graph the demand curve during the summer and for the rest of the year.
b) Graph the marginal cost curve for both markets.
c) Derive and graph the marginal revenue curve during the summer and for the rest of
the year.
d) What price should the airline charge during the summer and for the rest of the year
to maximize profits? How many tickets will be sold?

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Exercise 5
Suppose a monopolist transport provider faces a demand curve given by P = 30 - Q,
with marginal cost curve MC = Q.

a) Derive equilibrium price and quantity.

b) Derive and graph producer surplus, consumer surplus, and total economic
surplus.

c) Derive and graph the deadweight loss due to monopoly

Exercise 6

In the Bus industry in Cameroon aggregate demand is given by: Q=7600-200P

Where Q is the number of passengers served in the industry and P is the price per
passenger.
There are a number of identical, perfectly competitive buses active in the industry with
the
following costs of production:
AVC = 10+2q
FC = 50
MC = 10+4q

Where q is the number of passengers served by an individual bus company.

a) If the price per passenger is currently $18, how many ticket will each bus
company sell?
b) How many bus companies are currently operating in the industry? What is the
equation of the short run industry supply curve?
c) What is the typical bus company’s economic profit/loss in the short run and in the
long run? What will happen to the number of buses in the long run?

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 d) What is the long run equilibrium price, P, and the quantities q, Q. How many
active buses, N, will there be in the long run?
e) Suppose the market is in a long run equilibrium. Now suppose that CAMRAIL,
which serve as a substitute for Buses on this route, have suddenly had all rail
tracks damaged beyond repair. How would you expect P, q, Q and N to change in
the bus industry in both the short and long run?

Exercise 7

Let us consider that CAMER-CO has a monopoly right on two routes (Yaounde-Douala
and Yaounde-Maroua). CAMER-CO faces a demand curve given by

P = 120 – 3Q

The marginal cost curve for the Yaounde-Douala route is given by

MC1 = 10 + 20Q1

The second route’s marginal cost curve is given by

MC2 = 60 + 5Q2

Find the CAMER-CO ’s optimal total passengers and price. Also find the optimal division
of the monopolist’s passengers between the two routes.

Exercise 8

The table shows the airlines industry demand curve in an oligopolistic market. Assume just
two airlines companies. Each airlines company operates at a constant average cost and
marginal cost of 5 FCFA(in thousands of million )

Price FCFA 9 8 7 6 5 4 3 2 1 0
Quantity
Demanded 0 1 2 3 4 5 6 7 8 9

a) Calculate the marginal revenue curve and show that if both ailines collude to maximise
joint profits then the outcome will be the same as for a monopolist.
b) Why do airlines have to agree on the output each will produce?
c) Why might each airline be tempted to cheat if it can avoid retaliation by the other?
d) Suppose now that airlines merge and form a monopoly. Suppose there are potential
entrants who can operate at MC = AC = 7. What price will the monopoly charge?

Exercise 9

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A monopolist transport service provider faces a demand curve P = 210 – 4Q, and initially
faces a constant marginal cost MC = 10.

a) Calculate the profit maximising monopoly quantity and price and compute the
monopolist’s total revenue at the optimal price.
b) Suppose that the monopolist’s marginal cost increases to MC = 20. Verify that the
monopolist’s total revenue goes down.
c) Suppose that all firms in a perfectly competitive equilibrium had marginal cost MC
= 10. Find the long-run perfectly competitive industry price and quantity.
d) Suppose that all firms’ marginal cost increases to MC = 20. Verify that the increase
in marginal cost causes total industry revenue to go up.

Exercise 10

Imagine that VATICAN is a monopoly in the bus market for the Bamenda - Bafut Route
and for the Bamenda – Bali route. The market demand curve for the the Bamenda - Bafut
Route is

P = 968 – 20Q

Where P is the price per passenger in FCFA and Q is annual demand for tickets expressed
in thousands. In the Bamenda – Bali route, VATICAN can sell any amount of ticket it
wants at a marginal cost of 8 FCFA per passenger. Letting Q1 and MC1 denote the total
number of passengers and marginal cost at Bamenda – Bali route, we have

MC1 (Q1 ) = 8

The Bamenda - Bafut Route has a marginal cost function given by

MC2 (Q2 ) = 1 + 0.5Q2

a) Find VATICAN’s profit maximisation price and number of passengers for the
Bamenda - Bafut market overall. How will VATICAN allocate operation in terms
of total passengers between its Bamenda - Bafut route and its Bamenda – Bali
route?
b) Suppose the Bamenda – Bali route had a marginal cost of 10 FCFA rather than 8
FCFA per passenger. How would your answer to part (a) change?

Exercise 11

A monopolist’s average revenue and average cost function are given by:

AR = 1200 – 4Q

5
 400
AC = + 300 − 4Q + 3Q 2
Q

Where AR and AC are in FCFA

a) What is the equation of the monopolist’s demand curve?

b) What is the equation for total revenue?
c) What is the equation for marginal revenue?
d) What is the equation for total costs?
e) How much are total fixed costs?
f) What is the equation for marginal costs?
g) At what output is profit maximised?
h) What is the price at this output?
i) What is average cost at this output?
j) How much is average profit at this output?
k) How much is total profit at this output?

Exercise 12

Suppose you are given the following information about a particular transport industry:

QD = 6500− 100P Market demand

QS = 1200P Market supply
q2
C(q) = 722+ Firm total cost function
200
2q
MC(q) = Firm marginal cost function.
200
Assume that all firms are identical, and that the market is characterized by pure
competition.

a) Find the equilibrium price, the equilibrium quantity, the output supplied by the firm,
and the profit of the firm.
b) Would you expect to see entry into or exit from the industry in the long-run?
Explain. What effect will entry or exit have on market equilibrium?
c) What is the lowest price at which each firm would sell its output in the long run?
Is profit positive, negative, or zero at this price? Explain.
d) What is the lowest price at which each firm would sell its output in the short run?
Is profit positive, negative, or zero at this price? Explain.

LAGRANGE MULTIPLIER EXTRA QUESTIONS

Exercise 13

An airlines’ operation function is given by Q = L0.25 K 0.25 where L is the quantity of

labour employed and K is

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the quantity of capital employed. The price of labour is $20 and the price of capital is $5.
If the airlines’ costs are constrained to $320 find the maximum level of operation of
the airlines using the Lagrange multiplier method.

Exercise 14

The following operation function is that of a Bus company

1 1
Q = 12L3 K 2

Where L and K represent the units of labour and capital used in the operation process. If it
spends 600 FCFA on obtaining labour, L, and capital, K, at prices of 6 FCFA and 18 FCFA
respectively.
doit
a) To maximise its operation how much of each must it buy?
b) How much boarding passes does it generate?

Use the Lagrange multiplier method to solve the above problem.