(Topic: Monopolistic Competition. 20 points)
Consider the village of Fanjeaux – a beautiful, bucolic, historic (but remote) village in the province of Languedoc Roussillon, France. The Village Council has decided there will be only one gasoline station in the entire village. That is, only one gasoline station will be allowed to sell gasoline and this one gasoline station will have a monopoly.
However, this one gasoline station will have to pay the Village Council a royalty fee every year equal to 50 percent of its profits.
You are considering applying to the Village Council for the license to operate the single gasoline station. You estimate that your profit maximizing quantity of gasoline will be 100,000 liters per year; that you will charge 5 Euros (the currency used in France) per liter for gasoline; and that your average cost per liter of gasoline (including all fixed cost, variable cost and opportunity cost but not including the 50 percent royalty) is 2 Euros.
Given the above information, how much will your firm pay in royalties to the Village Council every year?
After your firm pays the royalty fee what will be its economic profits?
What is the maximum dollar amount your firm would be willing to pay in royalty fees to the Village Council every year for the monopoly right to sell gasoline in Fanjeaux?
Now suppose sometime after granting your firm the monopoly right to sell gasoline the Village Council eliminates the monopoly restriction on gasoline stations as well as the 10 percent royalty, and allows free entry into the village for gasoline stations. According to an expert in the market for gasoline, “Each new gasoline station will cause the price of a liter of gasoline to decrease by 0.50 Euros (1/2 of a Euro) and will cause the marginal cost of selling a liter of gasoline to increase by 0.25 Euros (1/4 of a Euro).”
What will be the equilibrium number of gasoline stations in Fanjeaux?
(Topic: Cartels and Game Theory, Chapter 12. 20…