ECON 2420
Monopoly
Charles L. Baum II
Greg Sandow’s Wall Street Journal
article, “False Notes,” comments on the financial status of symphony orchestras. This past year, several major orchestras, including the Philadelphia Orchestra and the Chicago Symphony, reported annual deficits. The current fiscal year, deficits may be due to a short-term decline in ticket sales following the September 11 terrorist attacks. One interesting economics point raised in the article is that the costs of an orchestra primarily are
fixed costs. During periods of a sales decline, the orchestra cannot trim its costs by laying off a violinist or two and a bassoonist. 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)
What are the fixed inputs in the short run? Band members and instruments are fixed.
b)
What is the fixed cost of production in the short run? Travel and arena rental is required for each concert.
c)
What is the marginal cost of an additional concert in the short run? MC = $100,000, from $50,000 for the arena and $1,000 for 50 band members to travel.
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
0.6
1.0
1.2
1.2
1.0
0.6
0
Marginal Revenue
-
0.6
0.4
0.2
0.0
-0.2
-0.4
-0.6
d)
What is the short run profit-maximizing number of concerts for the orchestra to perform? What is the profit-maximizing price? Maximize profits by producing where marginal revenue equals marginal cost (or by producing all the concerts for which marginal revenue is greater than marginal cost). This quantity is 3 concerts, with a ticket price of $20.
e)
What will short run profits be? Total revenue is $1.2 million. Total cost is total fixed cost of $2.0 million in salaries plus $0.25 in instruments plus $100,000 in variable costs for 3 concerts, which is 2.0 + 0.25 + 0.30 = $2.55 million. Total revenue minus total cost is $1.2 – 2.55 = -$1.35 million.
