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. 8. Construct Hot Air’s total revenue and marginal revenue schedules. 9. Draw a graph of the market demand curve and Hot Air’s marginal revenue curve. 10. Find Hot Air’s profit-maximizing output and price and calculate the firm’s economic profit. Output (smoothies per hour) Marginal cost (dollars per additional smoothie) Average variable cost Average total cost (dollars per smoothie) 3 2.50 4.00 7.33 4 2.20 3.53 6.03 5 1.90 3.24 5.24 6 2.00 3.00 4.67 7 2.91 2.91 4.34 8 4.25 3.00 4.25 9 8.00 3.33 4.44 Price (dollars per ride) Quantity demanded (rides per month) Total cost (dollars per month) 220 0 80 200 1 160 180 2 260 160 3 380 140 4 520 120 5 680

Answer 1

To maximize profits, the monopolist Hot Air Balloon Rides will find where MR=MC for quantity, use the demand curve to set a price above average total cost, and calculate economic profits as total revenue minus total costs.

Step-by-step explanation:

To calculate total revenue for Hot Air Balloon Rides, the single-price monopoly, we multiply each price by the corresponding quantity demanded from the provided demand schedule. Marginal revenue, which is the additional revenue from selling one more unit, is found by calculating the change in total revenue divided by the change in quantity. When constructing a graph, one would plot the market demand curve and the marginal revenue curve, observing that the marginal revenue curve lies below the demand curve due to the downward-sloping demand in a monopoly market.

To find the profit-maximizing output and price, Hot Air Balloon Rides will set quantity where marginal revenue (MR) equals marginal cost (MC). This quantity can then be matched to the demand curve to find the profit-maximizing price, which should be set where price is above the average total cost to ensure economic profits. To calculate economic profits, subtract total costs from total revenue at the profit-maximizing quantity.

For example, if the profit-maximizing quantity is 5 rides at a price of $180, total revenue would be $180 x 5 = $900, and if the average total cost is $5.24 per ride, the total cost would be $5.24 x 5 = $26.20, resulting in economic profits of $900 - $26.20 = $873.80. However, the correct numbers should come from detailed information provided in the student's table, which is not included in this example.