Question

1. Jimmy has a room that overlooks (from a distance) a major league baseball stadium. He decides to rent a telescope for $50 a week and charge his friends and classmates for a 30 second "peep" at the game. He can act as a single price monopolist for renting out "peeps"; for each person who takes a peep, it costs him $0.20 to clean the eyepiece. The following table illustrates the information that Jimmy has gathered about demand for this service. Price of Peep | Quantity Demanded 1.20 0 1.00 100 0.90 150 0.80 200 0.70 250 0.60 300 0.50 350 0.40 400 0.30 450 0.20 500 0.10 550 a. For each price in the table above, calculate the total revenue from selling peeps and the marginal revenue per peep. (4 marks) b. At what quantity will Jimmy's profit be maximized? What price will he charge? What will be his total profit? (4 marks) c. Jimmy's landlady complains about all the visitors coming into the building and tells Jimmy to stop selling peeps; Jimmy finds out, though, that if he gives her $0.20 per peep she'll stop complaining. What effect does this bribe have on Jimmy's marginal cost per peep? What is the new profit-maximizing quantity of peeps? What impact does this bribe have on Jimmy's total profit? (4 marks)

Only B and C

Answer 1

Price of peep	Quantity Demanded	Total revenue	Marginal Revenue
1.2	0	0	-
1	100	100	1
0.9	150	135	0.7
0.8	200	160	0.5
0.7	250	175	0.3
0.6	300	180	0.1
0.5	350	175	-0.1
0.4	400	160	-0.3
0.3	450	135	-0.5
0.2	500	100	-0.7
0.1	550	55	-0.9

Total Revenue = Price * Quantity

Marginal revenue = (Change in total revenue)/(Change in quantity)

b) Profit is maximized at an output at which marginal revenue = marginal cost or at a maximum output up to which the marginal cost remains less than or equal to the marginal revenue

Marginal cost per peep = $0.20 (to clean the eyepiece)

From the table, we observe that MC = $0.20 remains less than the MR = $0.30 up to a maximum quantity of 250 peeps

Therefore, the profit-maximizing quantity = 250 peeps

Price charged by Jimmy = $0.70

Total Cost = Fixed Cost + AVC * Quantity = $50 + $0.20 * Quantity = $50 + $0.20 * 250 = $100

Total Profit = Total revenue - Total Cost = $175 - $100 = $75

c) Cost of bribe = $0.20 per peep

Marginal cost per peep = $0.20 + Bribe = $0.20 + $0.20 = $0.40

At a marginal cost of $0.40, the maximum quantity up to which the marginal cost remains less than marginal revenue (=$0.50) is 200 peeps

Price charged by Jimmy = $0.80

Total Revenue = $160

Total Cost = $50 + $0.40 * 200 = $130

Total Profit = Total revenue - Total cost = $160 - $130 = $30

Due to the bribe, Jimy's profit decreased by $45.