Question

8. Meet Lobo. He is an alien bounty hunter and as such is a monopolistic competitor, given his brand of bounty hunting and has “requested” your help. He has a fixed cost of $5,000 and a constant marginal cost of $500 per job. If he faces a demand curve described by this equation: P = 1,000 – 10Q. (where P is the price he charges and Q is the number of jobs he takes)

a. At what price will Lobo break even and how many jobs will he have to take at that price?

b. Find Lobo's price and quantity where he maximizes profit

c. Calculate Lobo’s Monopoly profits from part b above

d. From your answers a through c above, convince Lobo that to make profit, he should not take on as many jobs as he can get his hands on. e. Suppose Lobo’s planet opens up and he is able to take jobs all over the galaxy, not just his planet, what would happen to Lobo’s price, number of jobs, and monopoly profits in the short run after opening up. (Assume that as the main man, Lobo charges different prices compared to all other bounty hunters and that before opening up, the bounty hunting market had reached its long run equilibrium without trade)

Answer 1

Meet Lobo. He is an alien bounty hunter and as such is a monopolistic competitor, given his brand of bounty hunting and has “requested” your help. He has a fixed cost of $5,000 and a constant marginal cost of $500 per job. If he faces a demand curve described by this equation: P = 1,000 – 10Q. (where P is the price he charges and Q is the number of jobs he takes)

Given that:

TC=5000+500q.

AC=5000/q+500

P=1000-10q

a. At what price will Lobo break even and how many jobs will he have to take at that price?

for Barack even P=AC
1000-10q=5000/q+500
500=5000+10q2 /q

=10q2-500q+5000=0
=Q2-50q+500=0
Q=50+-√(2500-4(500)

Q=50+-√500/2

Q=50+-22.36

Q=36.18
P=1000-361.8

P=638.20
b. Find Lobo's price and quantity where he maximizes profit

profit is maximum when MR = MC
MR=1000-20q

=500
Q=500/20

=25
LP=750
c. Calculate Lobo’s Monopoly profits from part b above

profit =PQ-TC

=25(750)-5000-300(25)
=18750-5000-7500

=6250

d. From your answers a through c above, convince Lobo that to make profit, he should not take on as many jobs as he can get his hands on.

:-clearly profit is maximal in part 'c' . b/C increasing jobs decreases the price leading to loss profit.

e. Suppose Lobo’s planet opens up and he is able to take jobs all over the galaxy, not just his planet, what would happen to Lobo’s price, number of jobs, and monopoly profits in the short run after opening up.

:-after opening up there will be increase in demand due to which there will be increase in price and quality and this leads to an increase in profit.