1. The following table shows the demand curve facing a monopolist who produces at a constant marginal cost of $10:
Price Quantity
18 0
16 4
14 8
12 12
10 16
8 20
6 24
4 28
2 32
0 36
a. Calculate the firm’s marginal revenue curve.
b. What are the firm’s profit-maximizing output and price? What is its profit?
c. What would the equilibrium price and quantity be in a competitive industry?
d. What would the social gain be if this monopolist were forced to produce and price at the competitive equilibrium? Who would gain and lose as a result?
2. Suppose a profit-maximizing monopolist is producing 800 units of output and is charging a price of $40 per unit.
a. If the elasticity of demand for the product is –2, find the marginal cost of the last unit produced.
b. What is the firm’s percentage markup of price over marginal cost?
c. Suppose that the average cost of the last unit produced is $15 and the firm’s fixed cost is $2000. Find the firm’s profit.
3. A certain town in the Midwest obtains all of its electricity from one company, Northstar Electric. Although the company is a monopoly, it is owned by the citizens of the town, all of whom split the profits equally at the end of each year. The CEO of the company claims that because all of the profits will be given back to the citizens, it makes economic sense to charge a monopoly price for electricity. True or false? Explain.
4. A monopolist faces the following demand curve:
Q = 144/P2
where Q is the quantity demanded and P is price. Its average variable cost is
AVC = Q1/2
and its fixed cost is 5.
a. What are its profit-maximizing price and quantity? What is the resulting profit?
b. Suppose the government regulates the price to be no greater than $4 per unit. How much will the monopolist produce? What will its profit be?
c. Suppose the government wants to set a ceiling price that induces the monopolist to produce the largest possible output. What price will accomplish this goal?
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