Question

In: Economics

1a) What model of market pricing behavior would be best suited to describe the production and...

1a) What model of market pricing behavior would be best suited to describe the production and pricing decisions being made here for Green Sparty soda (Perfect Competition, Monopoly, Monopolistic Competition)? Explain your answer.

1b) n addition to selling her own new soda, this entrepreneurial Spartan is also selling a generic cola which sells in the market at a price of $1 for a 2-liter bottle. What is the Marginal Revenue (MR) for selling a bottle of this generic cola?

Solutions

Expert Solution

(1.a.)Monopoly

As the product ( Green Sparty Soda ) is unique (the part b of the question provides the information that Green Sparty Soda is this producer's own new product) across the market. Since the producer is the only one who is producing that particular soda he (the producer ) can charge any price and consumer have to accept it.

Hence the possible characteristics of Green Sparty Soda Market -

1. One producer and many consumer.

2. Producer is price maker.

These are none but the very characteristics of a monopoly market

So the pricing and production decision of Green Sparty Soda can be best explained by Monopoly Market.

(1.b.) As the Cola is a general product in this market (given that cola is generic product) the producer can't charge any price in this market. Since it is well known to him that if he (the producer) charges a higher price, no consumer will buy from him as other producers may sell Cola at a lower price. Hence in this Cola market there will be a price competition which will led the market price to fall up to Marginal Cost.

Hence in this market for Cola Price will be fixed and equal to Marginal Cost as a Perfect Competitive Market.

We know that in Perfect Competitive Market -

Marginal Revenue = Price

We can also derive the above relation mathematically -

Total Revenue = Price × Quantity

Or, TR = P×Q

As we already discussed in the competitive market price is fixed i.e. P is fixed.

Now, Marginal Revenue is equal to -

MR = d/dQ ( TR) = d/dQ (P×Q) = P

Hence Price = Marginal Revenue .......(proved)

Hence in the Cola market Marginal Revenue = Price Charged per bottle = $1.


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