Question

1. Galileo's Telescope Galileo creates an ingenious new product called the telescope, which he plans on selling on the market through his company, Astronomy Inc. Galileo incurs no fixed costs, but each telescope costs $40 to make. He finds the demand curve for telescopes to be as follows (you may assume that there would be no demand for telescopes at any price above $60 and the table below shows how many units Astronomy, Inc can sell at various possible prices it can charge.) $60 Price Quantity $40 6 $30 8 $20 10 $10 12 2 T a. Is Astronomy Inc. in a perfectly competitive market? Explain in 1-2 sentences. b. Calculate the marginal revenue from each additional telescope produced. (Hint: Make a table). C. What quantity of telescopes should be produced by Astronomy, Inc., and at what price? (Note: you can assume that if there is a situation in which Galileo is indifferent about making or not making marginal telescopes, he will make them) Calculate total revenue, cost, and profit. Assume Astronomy Inc. is profit maximizing d. The Pope sees that Galileo is making a lot of money, and places a price ceiling on telescopes at $20. What should Galileo do? After intense pressure from angry scientists, the Pope decides to eliminate the fee from part (d), and to make amends, decides to subsidize the production of telescopes through a subsidy of $40 for each telescope produced. e. What is the price and quantity of telescopes produced now? What is Astronomy Inc.'s total profit now? f. Let's return to the pre-subsidy world for a moment that is, assume the subsidy from part (e) does not exist for this part). Because Galileo is a jetsetter, and the markets of the various European countries are not integrated, he decides to price discriminate, charging each customer his/her willingness to pay. If Galileo can perfectly price discriminate, what happens to social surplus and DWL?

Answer 1

a)No , it is not perfectly competitive market because there is only one seller. Perfectly competitive is the market where there are many buyers and sellers.

b) Marginal revenue is the revenue one gets when an additional unit of good is produced. MR=∆TR/∆no of units

Price	Quantity	total revenue	marginal revenue
60	2	120
50	4	200	80/2=40
40	6	240	40/2=20
30	8	240	0
20	10	200	-40/2=-20
10	12	120	-80/2=-40

c)Since the cost of making telescope is $40, the marginal cost should be equal to marginal revenue. This is the profit maximising condition

MR=MC =40. This would be when the price is $50 and 4 units are sold.

Cost =$40*4=$160

Total revenue=price * quantity

=$50*4=$200

Profit =$200-160=40

Since it is monopoly there would be supernormal profits.

d)Galileo would not produce since at this level, his marginal revenue is negative anf hence he would be profitted. So he would not produce.