Question

Price (dollars per ride) (1)	Quantity demanded (rides per month) (2)	Total cost (dollars per month) (3)
220	0	80
200	1	160
180	2	260
160	3	380
140	4	520
120	5	680

Suppose you own Hot Air Balloon Rides during a local sports event in Vancouver, Canada, which is a singleprice monopoly (see Figure 1). Columns 1 and 2 of the following table set out the market demand schedule and columns 2 and 3 set out the total cost schedule. Price (dollars per ride) (1) Quantity demanded (rides per month) (2) Total cost (dollars per month) (3) 220 0 80 200 1 160 180 2 260 160 3 380 140 4 520 120 5 680 Please apply relevant micrconomic theory and models to analyze and answer the following questions ( (please draw economic model charts as many as possible for your answers):

a) Construct Hot Air’s total revenue and marginal revenue schedules (mark: 15%).

b) Draw a graph of the market demand curve and Hot Air’s marginal revenue curve (mark: 15%). Price (dollars per ride) (1) Quantity demanded (rides per month) (2) Total cost (dollars per month) (3) 220 0 80 200 1 160 180 2 260 160 3 380 140 4 520 120 5 680 UCW Course Syllabus: CODE nnn MBAF 504 Spring Term VAN10 A2.docx 2

c) Find Hot Air’s profit-maximizing output quantaty and price and calculate the firm’s economic profit, and indicate Price (P), Quantity (Q), and Profit (P) in your graph. (mark: 15%). d) Calculate the firm’s Consumer Surplus (CS), Producer Surplus (PS), and total Deadweigh Loss (DWL) under this single-price monopoly by comparing the Perfect Competition: P, Q, Pi, CS, PS, and DWL, what can you conclude? (mark:15%)

e) If the government imposes a tax as 14% on Hot Air’s profit, how do its output and price change? ( mark:10%)

f) If instead of taxing Hot Air’s profit, the government imposes a sales tax on balloon rides of $30 a ride, what are the new profit-maximizing quantity, price, and economic profit? (mark:10%);

g) If your brother finds out that you profit from this Hot Air Balloon Rides, he wants to buy 2nd Balloon with similar cost structure and runs his Hot Ballon Riding business independtly (see Figure 2). What is your estimated market structure change in terms of P, Q, Pi, CS, PS, and DWL and why? (mark:10%);

h) If more and more vendors join in this market from the other provinces of Canada and the USA (see Figure 3), what can you predict the market structure change in terms of P, Q, Pi, CS, PS, and DWL. Please apply your key learnings from Microeconomic portion of this class to analyze and conclude here.(mark:10%). You may receive a Bonus mark (<=10) for your excellent economic analysis here.

Answer 1

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