Question

1. Let the market demand curve be P=1000 - 10Q. Assume the market is controlled by a monopolist. Let fixed cost be $10,000 and Marginal Costs (MC)=20Q.

a) What is the profit maximizing output?

b) What is the monopolist's total revenue at the profit maximizing output?

c) How much profit is the monopolist earning?

d) Assume the government breaks up the monopolist in order to create a perfectly competitive market of identical firms. Assume the MC curve is now the industry supply curve. By how much has consumer surplus increased from breaking up the monopolist?

e) What is the deadweight loss associated with the monopolist relative to the perfectly competitive market?

2. Suppose a firm's fixed costs are $50 and its marginal cost of producing q units is MC = 10 + 2q. The industry demand curve is given by P = 40 – QD (where quantity is given in thousands of units). If the firm operates in a perfectly competitive industry and the price of the good is $30, how many firms produce this good in the short run?

3.

Price: Quantity:

8    300

7    400

6 500

5 600

4 700

3 800

2 900

1 1000

The monopolist has fixed costs of $1,000 and has a constant marginal cost of $2 per unit. If the monopolist were able to perfectly price discriminate, how many units would it sell?

Show the work for each question, if possible. Thank you.

Answer 1