Question

Hot Air Balloon Rides is a single-price monopoly. Columns 1 and 2 of the table set out the market demand schedule and columns 2 and 3 set out the total cost schedule. $$\begin{array}{ccc} \begin{array}{c} \text { Price } \\ \text { (dollars } \\ \text { per ride } ) \end{array} & \begin{array}{c} \text { Quantity } \\ \text { (rides } \\ \text { per month) } \end{array} & \begin{array}{c} \text { Total cost } \\ \text { (dollars } \\ \text { per month) } \end{array} \\ \hline 220 & 0 & 80 \\ 200 & 1 & 160 \\ 180 & 2 & 260 \\ 160 & 3 & 380 \\ 140 & 4 & 520 \\ 120 & 5 & 680 \end{array}$$ Construct Hot Air's total revenue and marginal revenue schedules.

Short answer

TR: 200, 360, 480, 560, 600; MR: 200, 160, 120, 80, 40.

Step-by-step solution

- Calculate Total Revenue (TR)

Total Revenue (TR) is calculated by multiplying the price per ride by the quantity of rides. Use the following formula for each quantity: \[ TR = \text{Price} \times \text{Quantity} \]For instance, if the price is 200 dollars and the quantity is 1 ride, then: \[ TR = 200 \times 1 = 200 \]

- Calculate Marginal Revenue (MR)

Marginal Revenue (MR) is the change in total revenue that results from selling one additional ride. It is calculated using the following formula: \[ MR = \frac{\text{Change in TR}}{\text{Change in Quantity}} \]For example, if the TR increases from 0 dollars (0 rides) to 200 dollars (1 ride), the MR is: \[ MR = \frac{200 - 0}{1 - 0} = 200 \]

- Calculate Each Row of TR and MR

Repeat the above calculations for each level of quantity in the table:1. When Quantity is 1: \[ TR = 200 \times 1 = 200 \]\[ MR = \frac{200 - 0}{1 - 0} = 200 \]2. When Quantity is 2: \[ TR = 180 \times 2 = 360 \]\[ MR = \frac{360 - 200}{2 - 1} = 160 \]3. When Quantity is 3: \[ TR = 160 \times 3 = 480 \]\[ MR = \frac{480 - 360}{3 - 2} = 120 \]4. When Quantity is 4: \[ TR = 140 \times 4 = 560 \]\[ MR = \frac{560 - 480}{4 - 3} = 80 \]5. When Quantity is 5: \[ TR = 120 \times 5 = 600 \]\[ MR = \frac{600 - 560}{5 - 4} = 40 \]

Key concepts

Total Revenue

Total Revenue (TR) is a key concept in understanding how a monopoly prices its products. It represents the total amount of money a company makes from selling its goods or services. To compute TR, you simply multiply the price (P) by the quantity (Q) sold. For example, if a hot air balloon ride costs 200 dollars per ride and 1 ride is sold, the total revenue will be 200 dollars. The formula to calculate it is:

• Total Revenue (TR) = Price (P) × Quantity (Q)

The concept helps businesses understand their overall financial performance and is fundamental when determining profitability.

Marginal Revenue

Marginal Revenue (MR) is another essential revenue concept in monopoly pricing. It represents the additional revenue that a company earns when it sells one more unit of its product. To determine the MR, you calculate the change in total revenue (TR) divided by the change in quantity (Q). For instance, if the total revenue increases from 0 dollars (when 0 rides are sold) to 200 dollars (when 1 ride is sold), the marginal revenue is 200 dollars. The formula is as follows:

• Marginal Revenue (MR) = Change in TR / Change in Q

Understanding MR is crucial for monopolies when setting prices, as it helps to identify the optimal output level where they maximize their profits.

Market Demand

Market Demand describes the total quantity of a product that consumers are willing and able to purchase at various price levels. In the context of monopoly pricing, the demand schedule displays different quantities of rides that consumers would buy at different prices. For example, consumers might be willing to purchase 1 ride at 200 dollars but only 2 rides if the price drops to 180 dollars. Market demand graphs typically slope downwards, indicating that as the price decreases, the quantity demanded increases. Understanding market demand is crucial for setting the right price and maximizing both revenue and profit in a monopoly situation.

Cost Schedule

The Cost Schedule in monopoly pricing identifies the various costs associated with different levels of production. This includes both fixed and variable costs. In the given example, the total cost is noted for each quantity of rides. For instance, the total cost of providing 1 ride might be 160 dollars, while providing 2 rides might bring the total cost to 260 dollars. Understanding the cost schedule is vital for a monopoly to determine average and marginal costs. These help in making decisions about production levels and pricing strategies to maximize profit. The goal is to find the balance point where total revenue exceeds total cost to achieve maximum profitability.