Set05-ICIR - Econ 441 Problem Set 5 Alan Deardorff...

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Alan Deardorff Problem Set 5 Imperfect Competition, Increasing Returns Page 1 of 4 Problem Set 5 Imperfect Competition, Increasing Returns, etc. 1. Consider a monopolist in partial equilibrium who initially faces the demand curve D 1 shown below, and whose marginal cost is constant at c . a. Construct the profit-maximizing equilibrium for this monopolist. b. Suppose now that the demand curve becomes everywhere more elastic, but continues to pass through the same price-quantity point that you found to be optimal in part (a). (That is, if the profit-maximizing monopolist was producing Q 1 and selling it for p 1 in part (a), quantity Q 1 still has price p 1 on the new, more elastic, demand curve.) Construct the new equilibrium for the monopolist and compare it to the old, in terms of quantity, price, and profit. c. Explain what your answer to part (b) could have to do with international trade. 2. Explain why the gains from trade with imperfect competition may be larger than they are with perfect competition. Does it therefore follow that, if a country is going to trade in any case, it would be better off if its industries are imperfectly competitive instead of perfectly competitive, so as to enjoy those larger gains? Explain and illustrate using production possibility frontiers and community
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Set05-ICIR - Econ 441 Problem Set 5 Alan Deardorff...

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