Question

Suppose the market for Hula Hoops is monopolized by a single firm. a. Draw the initial cquilibrium for such a market. b. Now suppose the demand for Hula Hoops shifts outward slightly. Show that, in general (contrary to the competitive case), it will not be possible to predict the effect of this shift in demand on the market price of Hula Hoops. c. Consider three possible ways in which the price elasticity of demand might change as the demand curve shifts- -it might increase, it might decrease, or it might stay the same. Consider also that marginal costs for the monopolist might be rising, falling, or constant in the range where \(M R=M C\). Consequently, there are nine different combinations of types of demand shifts and marginal cost slope configurations. Analyze each of these to determine for which it is possible to make a definite prediction about the cffcct of the shift in demand on the price of Hula Hoops.

Short answer

Answer: The behavior of a monopolist firm when there is a change in the demand for Hula Hoops depends on various factors such as the direction of the demand shift and the slope of the marginal cost curve at the equilibrium. It is not possible to predict the exact effect of a shift in demand on the market price of Hula Hoops without considering these factors. However, by analyzing the different combinations of demand shifts and marginal cost slope configurations, we can determine the possible effects on the price of Hula Hoops, which may include an increase, decrease, or no change in price.

Step-by-step solution

Draw the demand curve, marginal revenue, and marginal cost curves

Start by drawing a downward-sloping demand curve (labeled D), an upward-sloping marginal cost curve (labeled MC), and a downward-sloping marginal revenue curve (labeled MR) below the demand curve. The demand curve represents the quantity of Hula Hoops demanded at each price level, while the marginal cost curve represents the cost of producing one additional Hula Hoop at each level of production. The marginal revenue curve represents the additional revenue made by the monopolist from selling one more Hula Hoop.

Locate the initial equilibrium point

To find the initial equilibrium point, look for the intersection between the MR and MC curves, which indicates the monopoly profit-maximizing level of production. This point is labeled E on the graph.

Determine the initial price and quantity

Now, draw a vertical line upwards from point E to the demand curve. The corresponding point on the demand curve is the initial equilibrium price (P1) and quantity (Q1) of Hula Hoops in the monopoly market. Label this point A on the graph. This shows the initial equilibrium for the monopolized market. #Part b: Show that it's not possible to predict the effect of a shift in demand on the market price of Hula Hoops#

Show an outward shift in demand

Draw a new demand curve (labeled D') to the right of the initial demand curve, representing an outward shift in demand. This could occur due to increased popularity or a change in consumer preferences for Hula Hoops.

Discuss the effect of the shift in demand on price

It is not possible to predict the effect of this shift in demand on the market price of Hula Hoops without knowing the change in the monopolist's marginal cost and marginal revenue curves relative to the new demand curve. Depending on the configuration of these curves, an outward shift in demand may lead to an increase in the market price, a decrease in the price, or no change in price. #Part c: Analyze the nine different combinations of demand shifts and marginal cost slope configurations#

Create a table with nine combinations

Create a table with three rows and three columns. Each row represents a possible change in price elasticity of demand as the demand curve shifts (increase, decrease, or stay the same), and each column represents possible types of marginal cost slope configurations (rising, falling, or constant) at the equilibrium where \(MR=MC\).

Analyze each combination

Analyze each possible combination of demand shifts and marginal cost slope configurations to determine the effect on the price of Hula Hoops. This requires recalling the relationship between price elasticity of demand and total revenue (when demand is elastic, an increase in price decreases total revenue, and when demand is inelastic, an increase in price increases total revenue). Additionally, consider how the monopolist's profit-maximizing behavior will be influenced by the direction of the marginal cost curve.

Summarize the possible effects on price

After examining each combination of demand shifts and marginal cost slope configurations, summarize the possible effects on the price of Hula Hoops for each scenario. Some combinations may lead to a definite increase or decrease in price, while others may not allow for a definite prediction. By following these steps, you will have analyzed the behavior of a monopolist firm in response to different scenarios related to a shift in demand for Hula Hoops and marginal cost slope configurations.