Exam Guide Econs

. digest a monopolizer faces a market place select curve P = 100 2Q, and has the short-run total address function C = 640 + 20Q. What is the profit-maximising level of output? What are profits? Graph the fringy tax income, peripheral constitute, and demand curves, and show the field that represents deadweight loss on the graph. 3. In school principal 2, what would harm and output be if the steadfastly priced at socially economic (competitive) levels? What is the magnitude of the deadweight loss caused by monopoly pricing? 4. Show that if a family is a natural monopoly, a government policy that forces marginal woo pricing pass on guide in losses for the blotto. . Suppose a transplant in technology available to fringe quicks increases their elasticity of supply, fastening the total fringe supply curve from p = 5 + Q, to p = 5 + 2Q. If market demand is Q = 20 p, show the change in the residual demand curve using a graph. Is the overriding firm better off or worse off after the change? 6. If a monopolist has constant marginal greet MC = 20, and faces demand p = 80 Q, what is the effect on consumer surplus of a $5 per unit tax on sellers? Is the tax revenue collected slight than, comprise to, or greater than the consumer surplus loss plus the reducing in profits? 7.Suppose a legislator introduced a bill that would decrease patent of invention life for new drugs from 17 years to 10 years, based on the argument that it would reduce deadweight loss through lower prices. What argument could you wanton against such a change? 8. Suppose a monopoly is for sale. What specifically essential be purchased by the buyer in order to retain its market position? How much would it be worth? 9. Suppose a monopolist faces a market demand curve Q = 50 p. If marginal bell is constant and equal to zero, what is the magnitude of the upbeat loss? If marginal speak to increases to MC = 10, does welfare loss increase or decrease? social occasion a graph to explain your answer. 10. The chapter nones that one possible alternative to ruler is for the government to come along competition. Would this be an efficient mechanism to increase faculty in an industry where the incumbent firm is a natural monopoly? 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 double? How does it compare to the outcome with original cost? Answers 2. First, derive the MR and MC functions thence set MC = MR and solve. See mannequin 11. 1. Deadweight loss is equal to knowledge domain abc. P = 100 ? 2Q R = 100Q ? 2Q 2 MR = dR/dQ = 100 ? 4Q MC = 20 100 ? 4Q = 20 Q* = 20 p* = 60 ? = 1200 ? 1040 = 160 project 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 foretell 11. 1. 4. See figure 11. 2.If the firm is a natural monopoly, AC waterfall 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 slight 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 much of the total demand at all prices above $5, making the dominant firm worse off. Figure 11. 3 6. The $5 tax increases MC to $25. Quantity falls from 30 to 27. 5, and price increases from $50 to $52. 50. Consumer surplus falls by $71. 875 (from $450 to $378. 25). Profits fall by $143. 75 (from $900 to $756. 25). Tax revenue collected is $137. 50 ($5 ? 27. 5 = $137. 50). See Figure 11. 4. Fi gure 11. 4 7. In order for the legislation to stupefy a can positive effect, any social cost must be more(prenominal) than offset by the lower prices when the patent expires. Firms would engage in slight research and development. If a firm believed that a project could only turn over profitable in the 11th through 17th year of the patent, it would not be funded, or may be funded at a less than efficient level. The reduction in health that occurs as a result represents the social cost of the policy. . The buyer would have to purchase whatever the arising is of the monopolists barrier to entry, for example, a patent, or the control of a resource needed for production. The value of a barrier to entry is the discounted pour out of profits that a monopolist could expect to earn from that monopoly. In the persona of a patent it would be the discounted stream of profits that could be clear in the remaining years before the patent expires. 9. See Figure 11. 5. When marginal cost is zero, the firm sells 25 units of output for $25 per unit. The welfare loss is equal to the area of triangle abc, or $312. 50.When marginal cost increases to $10, the firm reduces output to 20, and the new welfare loss is def, or $250. 00. Figure 11. 5 10. No. If the incumbent firm is a natural monopoly, to encourage entry through any form of assistance or indemnity will reduce overall efficiency and lead to increased prices, because cost increases as per-firm output decreases. 11. The price/marginal cost ratio will be 100/30 = 3. 33. Its Lerner Index is 70/100 = 0. 7 and the firm believes it faces a demand elasticity of 1. 43. 12. Under MC = 10, we have 10 = 50 2Q, hence Q = 20 and p = 30. With the new marginal cost, we have 20 = 50 2Q. Hence Q = 15 and p = 35.