Economics 102 Exercise 7 2nd Semester, 2009-10 (To be submitted on March 16, 2010) 1. mono!o"ist can !

roduce at constant a#era$e and mar$ina" costs o% & ' M& ' (. The %irm %aces a mar)et demand cur#e $i#en b* + ' (, - -. a. &a"cu"ate the !ro%it-maximi.in$ !rice-/uantit* combination %or the mono!o"ist. "so ca"cu"ate the mono!o"ist0s !ro%its and consumer sur!"us. b. 1hat out!ut "e#e" 2ou"d be !roduced b* this industr* under !er%ect com!etition (2here !rice ' mar$ina" cost)3 c. &a"cu"ate the consumer sur!"us obtained b* consumers in !art b. Sho2 that this exceeds the sum o% the mono!o"ist0s !ro%its and consumer sur!"us recei#ed in !art a. 1hat is the #a"ue o% the 4dead2ei$ht "oss4 %rom mono!o"i.ation? mono!o"ist %aces a mar)et demand cur#e $i#en b* + ' 70 - P. a. 5% the mono!o"ist can !roduce at constant a#era$e and mar$ina" costs o% & ' M& ' 6, 2hat out!ut "e#e" 2i"" the mono!o"ist choose in order to maximi.e !ro%its3 1hat is the !rice at this out!ut "e#e"3 1hat are the mono!o"ist0s !ro%its3 b. ssume instead that the mono!o"ist has a cost structure 2here tota" costs are described b* T& ' 0.2(+2 - (+ 6 ,00. 1ith the mono!o"ist %acin$ the same mar)et demand and mar$ina" re#enue, 2hat !rice-/uantit* combination 2i"" be chosen no2 to maximi.e !ro%its3 1hat 2i"" !ro%its be3 !er%ect"* discriminatin$ mono!o"ist can !roduce at a constant a#era$e and mar$ina" cost o% &'M&'10. The %irm %aces a demand cur#e $i#en b* + '100--. a. 1hat out!ut "e#e" shou"d he !roduce to maximi.e his !ro%its3 b. &a"cu"ate his tota" !ro%its. Su!!ose that a mono!o"* can !roduce an* "e#e" o% out!ut at a constant mar$ina" (and a#era$e) cost o% -(0 !er unit. 5% the %irm se""s can se"" its !roduct in t2o di%%erent mar)ets and the demand cur#e in the %irst mar)et is $i#en b* +1 ' 70--1 and the demand cur#e in the second mar)et is $i#en b* +2 ' 90 - 2-2. 1hat "e#e" o% out!ut shou"d be !roduced in each mar)et and 2hat !rice 2i"" !re#ai" in each mar)et. 1hat are the tota" !ro%its in this situation3 Su!!ose that tota" mar)et %or a !roduct is $i#en b* +T ' -10- 68000 2here + is the /uantit* !er *ear and - is the !rice !er unit. dominant %irm (!rice "eader) can !roduce the !roduct at -20 !er unit. Su!!ose a"so that there are 100 identica" sma"" !roducers the same !roduct, each 2ith a mar$ina" cost $i#en b* M& ' /62 2here / is the out!ut o% a t*!ica" %irm. 1hat out!ut "e#e" shou"d the !rice "eader !roduce and 2hat !rice 2i"" !re#ai" in the mar)et3 9o2 much 2i"" the com!etiti#e %rin$e (minor %irms) !roduce3

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