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Jason Welker

A Micro problem for the advanced Econ student | Welker's Wikinomics Blog - 5 views

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microeconomics monopoly Mankiw

shared by Jason Welker on 09 Nov 09 - Cached
  • Jason Welker on 09 Nov 09
     
    I love that Harvard Economics professor Gregory Mankiw blogs, but I hate that has de-activated the comments on his blog. Yesterday he posted a question from his own Harvard introductory economics class.  Since he doesn't allow comments though, I cannot tell if I'm solving it correctly. So I will re-publish it here and ask my readers to solve the problem in the comment section. IB and AP students who have studied microeconomic should be able to put some of their basic algebra skills to work to solve this one.
  • ...2 more comments...
  • Molly Saso on 10 Nov 09
     
    I may be wrong, but initially profit maximizing P and Q are $7 and 3 at MC = MR with profit of $10.5. Subsequently at a world price of $6, domestic demand is 4 units, but the monopolist's profit maximizing Q becomes 5 units (at MC =P). Therefore he exports one unit and his profit becomes $9.5. Thus the answer is a bit unexpected. I am not sure, but if the world price is $7 then does he produce 6 units of which he exports 3 units, since domestic demand falls? That conclusion presumes that he acts as a perfect competitor in the world market, but probably he will find a way of gaining global monopoly power! Molly
  • gene hayward on 10 Nov 09
     
    I think I solved most of it...I look forward to the answer...:)
  • Jason Welker on 10 Nov 09
     
    Molly, could you explain how you determined that at a world price of $6, the firm's profit maximizing Q would become 5 units? Why did we equalize P=MC to find the firm's output at a price of 6? I see why the firm becomes an exporter at a world price of $6 if they produce 5 units (since domestic Qs exceeds domestic Qd) but just not why we determine the firm's output by P=MC. Thanks!
  • Molly Saso on 17 Nov 09
     
    I guess I am assuming that once there is free trade the monopolist has to act like a perfect competitor and at least in the world market is a price taker. It's a bit like the monopsonist who has to become a wage taker once there is an effective minimum wage. Consequently he employs more workers since his MFC equals the wage.
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