Econ 419 – Industrial Organization
Jura Liaukonyte
Homework 1
Due Wed, Jan 31 in class (note: extended deadline)
Submit ONE version per study group. Write legibly.
I reserve a right not to grade messy or illegible answers.
Include a title page, listing the homework number and the names of all members of the study group.
PART I – Analytical Problems
1. Assume that a monopolist sells a product with a total cost function
2
400
TC
Q
=
+
The market demand curve is given by the equation
500
P
Q
=
−
.
a) Find the profitmaximizing output and price for this monopolist.
Is the monopolist profitable?
b) Calculate the price elasticity of demand at the monopolist's profitmaximizing price.
Also calculate the
marginal cost at the monopolist's profitmaximizing output.
c) Calculate the Lerner Index of Market power. Verify that Inverse Elasticity Pricing Rule holds at your calculated
equilibrium price and quantity.
2. In a certain market in the longrun, each firm and potential entrant has a longrun average cost curve
2
10
5
20
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 Spring '07
 jura
 Supply And Demand, Inverse demand function, market demand curve, longrun average cost, study group, longrun marginal cost

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