Microeconomics

Larry, Moe, and Jo run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Jo wants the saloon to bring in as much revenue as possible. Moe wamts to make the largest possible profits. Using a single diagram of the saloon's demand curve and cost curves, show the price and quantity combinations favored by each of the three partners. Expain.

Draw a graph for the standard monopoly model. For simplicity, draw a linear demand "curve" that touches the y-axis, and the subsequent linear marginal revenue line. Draw a linear Marginal cost curve.

Moe - easy - standard monopoly solution. output where MC=MR

Jo - a bit harder -- output where MR=0 (i.e., where MR crosses the x axis. At that Q, find the price from the demand curve.

Larry - hardest - Select a quanty Q such that the triangle-ish area between 0 and Q under the supply curve is equal to the box area formed by the selected Q and the corresponding Price from the demand curve.
(Note: if you have linear MR and demand curves and if you draw MC as a line coming out of the origion, At the point where MC=MR draw a HORIZONTAL line over to the demand curve. This horizontal line will be the price, where it hits the demand curve will be the desired Q, and the area of the Triange under MC formed by 0 and Q should equal the box formed by P and Q.


Total revenue is P*Q and is represented by box in your graph

I just realized my answer for Larry was way more complicated that it needed to be. Further, my answer only works if there are no fixed costs. The area under MC is total variable cost.

Anyway, simply draw a total average cost curve. Where the curve crosses the demand curve gives the price and quantity that gives zero profit.

the demand for a luxury good whose purchase would exhaust a significant portion of one's income is?

perfectly inelastic

It should be relatively elastic,since propotion is involved,then ralativity should be included,and since we know that we can live without luxury items then this its damand should be elastic

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asked by Alex
  1. perfectly inelastic

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    posted by sdf
  2. I don't know why you said it was perfectly inelastic when is not. Is relative elastic

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    posted by Diana
  3. The demand for a luxury good whose purchase would exhaust a big portion of one's income is

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    posted by matt

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