Question

4. Jimmy has a room that overlooks, from some distance, a major league baseball stadium. He decides to rent a telescope for S50.00 a week and charge his friends and classmates to use it to peep at the game for 30 seconds. He can act as a single-price monopolist for renting out "peeps." For each person who takes a 30-second peep, it costs Jimmy S0.30 to clean the eyepiece. The accompanying table shows the information Jimmy has gathered about the demand for the service in a given week. a. For each price in the table, calculate the total revenue from selling Price of Quantity a peep demanded of peeps $1.20 1 .00 0.90 0.80 b. At what quantity will Jimmy's profit be maximized? What price will he 0.70 0.60 0.50 100 150 200 250 300 350 400 450 500 550 peeps and the marginal revenue per peep. charge? What will his total profit be? Jimmy's landlady complains about all the visitors coming into the building and tells Jimmy to stop selling peeps. Jimmy discovers, however, that if he gives the landlady S0.20 for every peep he sells, she will stop complaining. What effect does the $0.20-per-peep bribe have on Jimmy's marginal cost per peep? What is the new profit-maximizing0.20 quantity of peeps? What effect does the $0.20-per-peep bribe have on 0.10 Jimmy's total profit? c. 0.30

Answer 1

a)

Price	Quantity	TR	MR
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

TR=P*Q

MR=Change in TR/change in Q

b) The profit maximizing rule is MC=MR

given, MC=0.30

so profits will be maximized when he sells 250 peeps

P=0.7

Profit = TR-TC

TR=250*0.70=175

TC=250*0.30+50 = 75+50=125

Profit = 175-125 = 50

c) When he pays the landlady 0.20 per peep then his MC will increase to 0.50 and setting MC=MR will decrease the profit maximizing output to 200 and price increases to 0.8

TR=200*0.8 = 160

TC=200*0.50+50 = 150

Profit = 160-150 = 10 so his total profit decreases due to the bribe