Exam Guide Econs Essay

1038 Words Oct 26th, 2012 5 Pages
Questions

2. Assume a monopolist faces a market demand curve P = 100 – 2Q, and has the short-run total cost function C = 640 + 20Q. What is the profit-maximizing level of output? What are profits? Graph the marginal revenue, marginal cost, and demand curves, and show the area that represents deadweight loss on the graph. 3. In question 2, what would price and output be if the firm priced at socially efficient (competitive) levels? What is the magnitude of the deadweight loss caused by monopoly pricing? 4. Show that if a firm is a natural monopoly, a government policy that forces marginal cost pricing will result in losses for the firm. 5. Suppose a change in technology available to fringe firms increases their elasticity of supply,
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11. If a monopoly firm sells a product with price $100, whose marginal cost is $30. What is the price/ marginal cost ratio? What is the Lerner Index? And what is the demand elasticity the firm believes it faces? 12. Suppose a monopoly firm with a constant marginal cost 10 faces an inverse linear demand function p = 50 – Q. What would be the profit-maximizing price and quantity if its marginal cost doubles? How does it compare to the outcome with original cost?

Answers

2.First, derive the MR and MC functions; then set MC = MR and solve. See Figure 11.1. Deadweight loss is equal to area abc. P = 100 − 2Q

R = 100Q − 2Q 2 MR = dR/dQ = 100 − 4Q MC = 20 100 − 4Q = 20 Q* = 20 p* = 60

π = 1200 − 1040 = 160

Figure 11.1 3. To solve for the competitive price and output, set MC = p.
20 = 100 − 2Q
* QC = 40 * pC = 20

The magnitude of the deadweight loss is $400, which is the area of triangle abc in Figure 11.1. 4. See Figure 11.2. If the firm is a natural monopoly, AC falls throughout the range of demand. When AC is falling, MC is below AC. By forcing the firm to price at marginal cost, revenue would be less than cost, and the firm would incur losses equal to area abcd.

Figure 11.2 5. See Figure 11.3. The change in technology reduces the slope of the fringe firm supply curve, allowing them to supply more of the total demand at all prices above $5, making the dominant firm worse off.

Figure 11.3 6. The $5

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