Assume that the United States only has one orchestra, making it a monopoly. Supp
ID: 1254698 • Letter: A
Question
Assume that the United States only has one orchestra, making it a monopoly. Suppose an orchestra concert requires the following four inputs: 50 band members, 50 instruments, travel expenses for each orchestra member, and an arena for each concert. Assume the four inputs have the following costs:50 orchestra band members each have a year-long contract paying $40,000.
50 instruments cost $5,000 each.
Travel expenses are $1,000 per orchestra member per concert.
Arena rental is $50,000 per concert.
Assume the orchestra is organized and ready to perform. Also assume that the short run is a month and that the long run is a year.
a) (2 pts) What are the fixed inputs in the short run?
b) (2 pts) What is the fixed cost of production in the short run?
c) (2 pts) What is the marginal cost of an additional concert in the short run?
Suppose that each orchestra concert arena holds 20,000 people and that each orchestra concert sells out. Let the following schedule represent the demand for (sold out) orchestra concerts in the United States at various prices:
Price $35 $30 $25 $20 $15 $10 $5 $0
Concerts 0 1 2 3 4 5 6 7
Total Revenue
Marginal Revenue
d) (5 pts) What is the short run profit-maximizing number of concerts for the orchestra to perform? What is the profit-maximizing price?
e) (5pts) What will short run profits be?
Explanation / Answer
Assume that the United States only has one orchestra, making it a monopoly. Suppose an orchestra concert requires the following four inputs: 50 band members, 50 instruments, travel expenses for each orchestra member, and an arena for each concert. Assume the four inputs have the following costs: 50 orchestra band members each have a year-long contract paying $40,000. 50 instruments cost $5,000 each. Travel expenses are $1,000 per orchestra member per concert. Arena rental is $50,000 per concert. Assume the orchestra is organized and ready to perform. Also assume that the short run is a month and that the long run is a year. a) (2 pts) What are the fixed inputs in the short run? Fixed short-run inputs are only the cost of the arena. The rest are variable costs b) (2 pts) What is the fixed cost of production in the short run? 50,000 per concert c) (2 pts) What is the marginal cost of an additional concert in the short run? 50,000 Suppose that each orchestra concert arena holds 20,000 people and that each orchestra concert sells out. Let the following schedule represent the demand for (sold out) orchestra concerts in the United States at various prices: Price $35 $30 $25 $20 $15 $10 $5 $0 Concerts 0 1 2 3 4 5 6 7 Total Revenue 0 30 50 60 80 75 60 35 0 Marginal Revenue 30 20 10 20 -5 -15 -35 d) (5 pts) What is the short run profit-maximizing number of concerts for the orchestra to perform? What is the profit-maximizing price? concerts 4 and price is 20 This gives us a total revenue of 80 e) (5pts) What will short run profits be? profit =TR-TC TR=4 concerts*20 per ticket*20000 people=1600000 TC=50 orchestra band members *40,000 per contract+50 instruments * 5000 each+ Travel expenses $1,000 * 50 orchestra member *4 concerts+Arena rental $50,000 * 4concerts=2,000,000+250,000+200,000+200,000=2,650,000 TR-TC 1,600,000-2,650,000=-1,050,000 They will incur a loss in the short run and should consider a new startegy