Exam Guide Econs
Questions
2. Assume a monopolist faces a market demand curve P = 100 – 2Q, and has the short-run total cost function C = 640 + 20Q. What is the profit-maximizing level of output? What are profits? Graph the marginal revenue, marginal cost, and demand curves, and show the area that represents deadweight loss on the graph. 3. In question 2, what would price and output be if the firm priced at socially efficient (competitive) levels? What is the magnitude of the deadweight loss caused by monopoly pricing? 4. Show that if a firm is a natural monopoly, a government policy that forces marginal cost pricing will result in losses for the firm. 5. Suppose a change in technology available to fringe firms increases their elasticity of supply, altering 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 dominant firm better off or worse off after the change? 6. If a monopolist has constant marginal cost 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 less than, equal to, or greater than the consumer surplus loss plus the reduction in profits? 7. Suppose a legislator introduced a bill that would decrease patent 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 make against such a change? 8. Suppose a monopoly is for sale. What specifically must 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 cost is constant and equal to zero, what is the magnitude of the welfare loss? If marginal cost increases to MC = 10, does welfare loss increase or decrease? Use a graph to explain your answer. 10. The chapter notes that one possible alternative to regulation is for the
2. Assume a monopolist faces a market demand curve P = 100 – 2Q, and has the short-run total cost function C = 640 + 20Q. What is the profit-maximizing level of output? What are profits? Graph the marginal revenue, marginal cost, and demand curves, and show the area that represents deadweight loss on the graph. 3. In question 2, what would price and output be if the firm priced at socially efficient (competitive) levels? What is the magnitude of the deadweight loss caused by monopoly pricing? 4. Show that if a firm is a natural monopoly, a government policy that forces marginal cost pricing will result in losses for the firm. 5. Suppose a change in technology available to fringe firms increases their elasticity of supply, altering 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 dominant firm better off or worse off after the change? 6. If a monopolist has constant marginal cost 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 less than, equal to, or greater than the consumer surplus loss plus the reduction in profits? 7. Suppose a legislator introduced a bill that would decrease patent 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 make against such a change? 8. Suppose a monopoly is for sale. What specifically must 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 cost is constant and equal to zero, what is the magnitude of the welfare loss? If marginal cost increases to MC = 10, does welfare loss increase or decrease? Use a graph to explain your answer. 10. The chapter notes that one possible alternative to regulation is for the