ProbSet1Ans_Solutions - AEM 331 Suggested Answers to...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
AEM 331 Suggested Answers to Problem Set #1 1. a. The Harvard person would say that the market structure is established, and the monopolist would use her market power. Profit is: P*Q – C(Q) = (74 – 3Q)*Q – 2*Q = 74*Q – 3*Q^2 – 2*Q. Setting the derivative equal to zero (in the case of the monopolist, this is setting marginal revenue equal to marginal cost), we have 74 – 6Q = 2. So: Q = 12, P = 38 Plotting this on a graph, we can solve for CS and PS geometrically: CS = (36*12)/2 = 216, PS = 36*12 = 432, W = 648 b. The Chicago person would say that the threat of entry would keep the monopolist from raising the price. Since anyone can enter and charge P = 2, the monopolist has to charge P = 2 to avoid being undercut. Therefore: P = 2, Q = 24, CS = (24*72)/2 = 864, PS = 0, W = 864 Note that the idea of a market with only one supplier having a perfectly competitive equilibrium is known as contestability. 2.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This homework help was uploaded on 02/20/2009 for the course AEM 3310 taught by Professor Prince,j. during the Spring '08 term at Cornell University (Engineering School).

Page1 / 2

ProbSet1Ans_Solutions - AEM 331 Suggested Answers to...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online