Question

Question 1. The demand for Famous Idaho Potato Bowl tickets (in Boise) is shown below. The marginal cost of supplying seats is zero up to Albertsons Stadium capacity of 30,000. Famous Idaho Potato Bowl Ticket Market $/ticket 200 т 180 demand 160 140 120 100 80 60 40 20 100 45 thousands of tickets (a) Suppose the Famous Idaho Potato Bowl manager decides to maximize profnt. What happens? Illustrate your answer. Now suppose Idaho governor decides to control the ticket price according to the principle of perfect competition. Then, what happens? (b) Suppose that the fixed cost of putting on the Famous Idaho Potato Bowl is $1.5 million, and suppose that the gate is the Bowl's only revenue. What is the profit in both cases above? Comment on the implications of your results for the choice between monopoly and competitive pricing: compare your conclusion to the economist's traditional preference for competition. (c) What is the elasticity of demand at a price of $100? At the profit-maximizing price? At the competitive price?

Answer 1

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Demand curer rightarrow p - Q = 160-0/0 - 40 (Q - 40) p = -4 (Q - 40) rightdoublearrow P = 160- 4Q or Q = 160-p/4 If he want to maximise profit he would or sell it such that MR = MC MR = partial differential(IR)/partial differential Q = partial differential/partial differential Q ((160 - 4 Q) Q) = 160 - 8Q MC = f(Q) = 0, for Q < 30 hence for MR = Mc = 0 rightdoublearrow 160 - 8Q = 0 rightdoublearrow Q = 20 to maximise profit he must sell 20,000 tickets i.e he must meet half his demand at Q = 20 P = 80 rightdoublearrow TR = PQ = 1600,000 = $1.6m rightdoublearrow TR = 20,000 times 80 = $1.6m rightdoublearrow 1.6 -1.5 = 0.1 m = 100, 000 (c) at P = 100 elasticity of demand e_m = Q_m/P_m = squareroot 625 + 10,000/squareroot 225 + 3600 e = -1.67