1. A monopolist can produce at a constant marginal and average cost of $1/unit and faces a market demand curve of
Q = 100 – 20P and MR=5-Q/10 where Q is quantity (in thousands), MR is marginal revenue and P is price.
a. Calculate the quantity and price that maximizes the profit for the monopolist.
b. What is the efficient level of output (maximizes social welfare) of the market?
c. Calculate the consumer surplus, producer surplus and deadweight loss under monopoly? Show these areas on the graph.
d. What is the profit of the monopolist?
e. If the monopolist finds a way to perfectly discriminate prices of each consumer, what is the size of producer surplus, consumer surplus?
2. Suppose the government provides a production subsidy s to firms in monopolistic competitive market. Explain what happens to profit of the typical firm in the market, the number of firms in the market both in short-run and in long-run?
3. Larry, Curly, and Moe run the only pub in a small town. Larry wants to sell as many drinks as possible without losing money. Curly wants the pub to bring in as much revenue as possible. Moe wants to make the largest possible profits. Using a single diagram of the pubs demand curve and its cost curves, show the price and quantity combinations favored by each of the three partners. Explain.