Case for Instructiecollege 3, Economics 1.2, Bedrijfskunde. From competition to
monopoly.
In this case we study the travel market. Several travel agencies offer their services to the
market. The weekly output of a travel agency is indicated by q and is measured in units of
10 travel kilometers. A travel agency has the following cost function that gives the
weekly costs as a function of the output level q:
1 2
C (q) q 5q 1000
10
The costs consist of a variable part and a fixed part. Within a year, the fixed costs cannot
be avoided. In the long run, the fixed costs can only be avoided by going out of business.
A. Indicate and graph the total costs, the variable costs, and the fixed costs.
B. Determine and graph the marginal costs, the average costs, the average variable
costs, and the average fixed costs.
The supply decision of a travel agency consists of two steps:
(i) The decision to enter or exit the market.
(ii) How many travelling kilometers to supply.
These decisions are both influenced by the market price and by the costs.
C. The entry or exit decision is characterized by the minimum price at which the
travel agency is willing to provide its services to the market. Determine the
minimum price
(a). In the short run (within a period of a year).
(b). In the long run (period longer than a year).
D. (a). Determine the supply curve of a travel agency
(b). Make a graph of the supply curve. In your graph also indicate the point that
characterizes the entry /exit decision.
E. There are 80 travel agencies in the market. This number is fixed in the short run.
They are all identical: they all face the same cost function given above. We
indicate the total market supply by Qs (again expressed in terms of units of 10
kilometers). Determine the market supply curve.
F. The other side of the market consists of the consumers who have a certain demand
for travelling. For the consumers the travel agencies are perfect substitutes: they
don’t care where they book their travel. The market demand curve (obtained by
1
monopoly.
In this case we study the travel market. Several travel agencies offer their services to the
market. The weekly output of a travel agency is indicated by q and is measured in units of
10 travel kilometers. A travel agency has the following cost function that gives the
weekly costs as a function of the output level q:
1 2
C (q) q 5q 1000
10
The costs consist of a variable part and a fixed part. Within a year, the fixed costs cannot
be avoided. In the long run, the fixed costs can only be avoided by going out of business.
A. Indicate and graph the total costs, the variable costs, and the fixed costs.
B. Determine and graph the marginal costs, the average costs, the average variable
costs, and the average fixed costs.
The supply decision of a travel agency consists of two steps:
(i) The decision to enter or exit the market.
(ii) How many travelling kilometers to supply.
These decisions are both influenced by the market price and by the costs.
C. The entry or exit decision is characterized by the minimum price at which the
travel agency is willing to provide its services to the market. Determine the
minimum price
(a). In the short run (within a period of a year).
(b). In the long run (period longer than a year).
D. (a). Determine the supply curve of a travel agency
(b). Make a graph of the supply curve. In your graph also indicate the point that
characterizes the entry /exit decision.
E. There are 80 travel agencies in the market. This number is fixed in the short run.
They are all identical: they all face the same cost function given above. We
indicate the total market supply by Qs (again expressed in terms of units of 10
kilometers). Determine the market supply curve.
F. The other side of the market consists of the consumers who have a certain demand
for travelling. For the consumers the travel agencies are perfect substitutes: they
don’t care where they book their travel. The market demand curve (obtained by
1
