Question

Made the right way with fresh ingredients, boeuf bourguignon (look it up!) is the best thing ever. Your friend Ella Marija Lani Yelich-O'Connor has abandoned her music career to open a bistro, which specializes in boeuf bourguignon and other French food, including crème brulee. She has done some market research and finds that your neighbors value boeuf bourguignon dinners according to the following schedule:

Servings	MU boeuf bourguignon
1	$60.00
2	$58.00
3	$56.00
4	$54.00
5	$52.00
6	$50.00
7	$48.00
8	$46.00
9	$44.00
10	$42.00
11	$40.00
12	$38.00
13	$36.00
14	$34.00

Ella makes boeuf bourguignon using equipment that she rents for $75 and beef, potatoes, wine and other ingredients that cost $12.50 a serving. (Note that she signed a lease and pays the rent regardless of how many dinners she serves.) She hires workers at $25 each and finds that they produce servings according to the following schedule:

Servings	Total Workers
1	0.30
2	1.00
3	1.90
4	3.00
5	4.30
6	5.80
7	7.50
8	9.40
9	11.50
10	13.80
11	16.30
12	19.00
13	21.90
14	25.00

Perfect competition and equilibrium.

3a. Put the demand and supply curves together (at the original productivity and wages). Ella is a musician and never took Economics so she naively assumes that she is in a perfectly competitive market. How many servings will she sell?

3b. Draw the graph again and shade in the entire area of consumer surplus. Shade in the entire area of producer surplus.

3c. Calculate consumer surplus as the sum of the difference between the marginal utility and the price for each serving up to the last sold. Calculate producer surplus as the sum of the difference between price and marginal cost for each serving.

Monopoly and equilibrium

4a. Ella gets smart and realizes that she is the only quality bistro around. Calculate the marginal revenue she gets for each additional serving as the change in total revenue (price times sales). Graph this. What is the new quantity of sales and the new price.

4b. Shade in the entire area of consumer surplus on your monopoly graph. Shade in the entire area of producer surplus.

4c. Calculate total consumer and total producer surplus under the monopoly situation.

4d. Compare the sum of consumer and producer surplus for the monopoly with the results for perfect competition. Which is better for consumers? Which is better for producers?

Moving Equilibrium. Show the effect of each on the monopoly market equilibrium; you don’t need to have exact answers but explain the direction of change in the demand and/or marginal cost curves.

5a. Beef prices rise.

5b. There is good weather, and potatoes are in abundant supply.

5c. Taylor Swift opens a restaurant across the street.

5d. A local restaurant reviewer praises the quality of Ella’s boeuf bourguignon.

Answer 1

A monopoly equilibrium is obtained at intersection of MR and MCcurves.In each graph, D0, MR0 & MC0 are initial demand, MR& MC curves. For simplicity, a linear MC curve is assumed.Initial equilibrium is at point A with price P0 and output Q0.

(5a) Higher beef price (an input) will increase marginal cost,shifting MC curve upward to MC1, intersecting MR0 at point B.Equilibrium price will rise to P1 and output will fall to Q1.

(5b) Abundant supply of potatoes (an input) will lower the costof potato, decreasing input cost. This will shift MC curve downwardto MC1, intersecting MR0 at point B. Equilibrium price willfall to P1 and output will rise to Q1.

(5c) Opening of another restaurant will increase competition,lowering demand. The demand curve (and MR) will shift leftward toD1 (and MR1). New equilibrium is at point B where MR1 intersectsMC0 with lower price P1 and lower output Q1.

(5d) Positive review will increase demand. The demand curve(and MR) will shift rightward to D1 (and MR1). New equilibrium isat point B where MR1 intersects MC0 with higher price P1 and higheroutput Q1.