review_problems1 - profit, and the deadweight loss if the...

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Review Problems 1 Economics 304K: Principles of Microeconomics Prof. Meg Ledyard Question 1 Suppose that the firm can be either high or low cost. A high cost firm has MC = 10 and a low cost firm has MC = 2. The FC for both types is 350. The firm knows its costs, but the government only knows that it is one of these types. Demand for the good is given by Q = 600 – 10P. Design an incentive compatible contract for this industry. Question 2 Consider an industry that is a Natural Monopoly. a. Show the profit maximizing q, price the monopolist charges, the monopolist’s profit, and the deadweight loss if the industry is not regulated. b. Show the profit maximizing q, price the monopolist charges, the monopolist’s profit, and the deadweight loss if the firm is regulated with MC pricing. c. Show the profit maximizing q, price the monopolist charges, the monopolist’s
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Unformatted text preview: profit, and the deadweight loss if the firm is regulated with ATC pricing. d. What are the benefits of MC pricing over ATC pricing? e. Why does the government regulate the Natural Monopoly? Question 3: Suppose that there is a community that is thinking of building a public swimming pool (suppose they wont keep anyone out and it wont be crowded). There are 5 people in the community. They all value the pool differently. Their values for the pool are as follows: Ryan 100 Seth 200 Summer 300 Taylor 400 a. Suppose that the pool costs 950 to build. Is it efficient to build the pool? b. What if the pool costs 1050? c. Suppose that each was asked to voluntarily contribute to the pool, what problem are we likely to see? d. What is one way to fix this?...
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