# Excercises2Answers - EXCERCISES 1B MONOPOLIES Here are the...

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1 EXCERCISES 1B: MONOPOLIES Here are the solutions to the second exercise. 1. Optimal outcome. The optimal is found by maximizing total surplus with respect to Q and setting it equal to zero. Total surplus is given by the area under the demand curve above the cost curve, or: TS = P(Q)dQ – TC = 120Q-½Q 2 -½Q 2 = 120Q - Q 2 dTS/dQ = 120 – 2Q = 0 Q = 60 Price is given by 120 – Q = 120 – 60 = 60 Profit or producer surplus is P*Q – Cost: Π = 120Q - Q 2 - ½Q 2 = 120Q – 1½Q 2 = 120(60) – 1½(60) 2 Π = 1800 Consumer surplus is the area under the demand curve, above price, or: CS = P(Q)dQ – P*Q = 120Q-½Q 2 -120Q+Q 2 = ½Q 2 CS = 1800 Total surplus can be found by plugging Q into the equation above: TS = 120Q - Q 2 = 120(60) – (60) 2 TS = 3600

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2 Table 1 summarizes the answers. 2. Monopoly outcome. The monopolist maximizes profit, so maximize the equation for profit Π = 120Q – 1½Q 2 d Π /dQ = 120 –3Q = 0 Q = 40 Plug Q into each equation above to find price, consumer, producer, and total surplus. See table 1.
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Excercises2Answers - EXCERCISES 1B MONOPOLIES Here are the...

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