E130PS2 - Professor Valerie Ramey Econ 130, Fall 2007...

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P r o f e s s o r V a l e r i e R a m e y Econ 130, Fall 2007 Problem Set #2 1. Suppose an industry faces the following cost and demand characteristics. The inverse demand curve is given by: P = 100 – Q. The fixed cost of building the plant is $500. Once the plant is built, the marginal cost of providing the good is $10. A. What is the socially optimal amount of the good produced? B. Draw the demand curve, average cost curve (AC = (500 + 10 Q)/Q), the marginal cost curve. C. Suppose a monopolist produces this good. MR is given by MR = 100 – 2Q. What is the profit-maximizing level of output and price for the monopolist. D. As a government regulator, you decide to mandate that the monopolist use average cost pricing. Calculate what the regulated price should be and what quantity would be produced. 2. Show how the structure of marginal costs and demand make electricity prices so volatile. 3.
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E130PS2 - Professor Valerie Ramey Econ 130, Fall 2007...

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