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Handout 12
Handout 12
Problems
1. A monopoly faces a market demand curve given by P = 42 – Q. Its marginal cost curve is
given by MC = Q.
a. What is the equation for the marginal revenue? Show this on a graph.
b. Find the profit-maximizing level of production for this monopolist.
c. What price will the monopolist charge?
d. What price and quantity would be socially optimal?
e. What is this monopolist’s total revenue?
f. Graph the producer surplus, the consumer surplus, and the deadweight loss for the
market with the monopolist.
3. True or False: A firm in perfectly competitive market will always earn zero economic profit.
4. Suppose a monopolistic local utility company faces a demand curve given by P = 120 – 4Q.
Total cost for this firm is given by TC = 400 + 4Q, and MC is fixed at $4 per unit.
a. Does the technology of a firm represent economies of scale?
b. What is the fixed cost? Does this indicate high barriers to entry?
c. What is the socially optimal level of production and price?
d. Suppose this industry operates as a monopoly. Find the equilibrium price and quantity.
e. The government, bowing to public pressure to regulate monopolies, decides to force
firms to charge their marginal cost just like they would in perfect competition. How much
will the monopolist produce? What is the profit for this monopolist?
f. Suppose the government instead chooses to force the monopolist to charge a price equal to
their average total cost, this monopolist will supply 25 units. What will be their profits?
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ECON 101: Principles of Microeconomics – Discussion Section Week 12
TA: Kanit Kuevibulvanich
Practice Questions for Midterm 2
2) Elasticity
Which of the following statements is false?
a. If Andrew’s income elasticity of demand for good X is equal to zero, Andrew’s demand for
good X would not be affected if he suddenly loses his job.
b. For Mary, honey is a substitute for sugar. Then, her cross-price elasticity of demand for
honey and sugar must be positive.
c. The Internet has made it easier for people to search for a large number of products on
websites like eBay and Amazon. This should result in a higher price elasticity of demand for
many goods.
d. For John, apples are an inferior good. Then, his income elasticity of demand for apples must
be positive.
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ECON 101: Principles of Microeconomics – Discussion Section Week 12
TA: Kanit Kuevibulvanich
5) Consumer Theory (with crossover to Elasticity)
Use the following diagram to answer the next question.
Direction of higher utility
Y
IC1 IC2 IC3 IC4
X
What can you conclude about goods X and Y from the above diagram?
a. The cross-price elasticity of demand for goods X and Y is equal to positive infinity.
Y b. The income-elasticity of demand for good Y is positive.
c. IC
The1
cross-price
IC2 elasticity of demand for goods X and Y is equal to zero.
d. The cross-price elasticity of demand for goods X and Y is equal to negative infinity.
6) Consumer Theory
Use the following graph to answer the next question.
Y1
BL1 BL2
X
If a consumer consumes at point A, his marginal rate of substitution is ________ than the price
ratio. Hence the consumer can get a higher utility by ________ the consumption of Good B and
by ________ the consumption of good A.
a. Larger; decreasing; increasing
b. Larger; increasing; decreasing
c. Smaller; decreasing; increasing
d. Smaller; increasing; decreasing
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ECON 101: Principles of Microeconomics – Discussion Section Week 12
TA: Kanit Kuevibulvanich
7) Production and Cost
Suppose the marginal cost curve is increasing. If at a quantity q* the marginal cost curve is
above the average total cost curve, we can conclude that:
a. q* is larger than the quantity at which the average total cost curve achieves its minimum.
b. q* is smaller than the quantity at which the average total cost curve achieves its minimum.
c. At q* the average total cost curve has a negative slope.
d. At q* the marginal cost curve has a negative slope.
B C
P1
E
D F!
C1 MC = ATC
O Q1 Q2 Q
MR
From the information in the above figure we can say that:
a. Monopoly revenues are given by the area BCQ1O.
Solutions:
b. The
Question 1 deadweight loss in this market is given by the area CEF.
a. c. Profit
Themaximization:
total profit produce at Pmonopolist
for this = MC, so q* = is
35.given
Marginal
byrevenue = $30,
the area since we are in
BCED.
perfectly competitive market. If the price you asked is higher than $30, I can walk away.
d. All of the above.
Total revenue = 30 x 35 = $1050.
b. Total cost = ATC x q = 40 x 35 = $1400.
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c. Loss = (40 – 30) x 35 = $350, since fixed cost = $700, do not shutdown.
d.
Fixed cost = (40 – 20) x 35 = $700. Total variable cost = $1400 – $700 = $700.
e. Breakeven is the lowest point of ATC, which MC also cuts through, so Pbreakeven = $38.
Shutdown is the lowest point of AVC, which MC also cuts through, so Pshutdown = $15
f. Fixed cost does not matter to quantity q* that maximizes profit since it is the point where P =
ECON 101: Principles of Microeconomics – Discussion Section Week 12
TA: Kanit Kuevibulvanich
Solutions:
Question 1
a. Double the slope of the demand curve to get the MR: MR=42-2Q. Graph should show a line
twice as steep as the original demand curve, but with the same intercept.
b. Set MR = MC to get 42 – 2Q = Q ⇒ Q=14.
c. Plug the Q from part b. into the demand curve: P = 42 – 14 = $28.
d. Socially optimal price where MC = P ⇒ 42 – Q = Q ⇒ Q = 21, P = 42 – 21 = $21.
e. TR = P x Q = 28 x 14 = 392
f.
P
MC
CS
P*
DWL
PS
MR D
0
Q*
Q
Question 3 False. Firms in perfectly competitive market can make profit or loss.
Question 4
a. Since ATC = TC/Q = 400/Q + 4, this exhibits economies of scale. ATC decreases in Q over
the range of Q’s for which there is demand.
b. FC = $400. Yes, there are high barriers to entry.
c. Social optimum where P = MC ⇒ 4 = 120 – 4Q ⇒ Q = 29, P = $4
d. MR = 120 – 8Q ⇒ 120 – 8Q = 4 ⇒ Q = 14.5 ⇒ P = 120 – 4(14.5) = $62
e. The monopolist will produce at the social optimum quantity of 29 units.
TC = 400 + 4(29) = $516, TR = (4)(29) = $116, Profit = -$400
⇒ Government subsidy will be required to keep this firm in business.
f. Since P = ATC. The firm will earn zero profit.
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