Quiz 4 Ec21 S2013 Solutions.pdf

# Quiz 4 Ec21 S2013 Solutions.pdf - Dartmouth ID(not name...

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Page 1 of 4 Dartmouth ID ( not name): ___________________________ Economics 21 Spring 2013 Quiz 4, SOLUTIONS 1. Short Answer Questions (15 points, 3 points each) a. Define “natural monopoly”: A market has a natural monopoly if one firm can produce the total output of the market at a lower cost than any other combination of firms could. b. Define “Bertrand equilibrium” (if you use jargon in your definition, be sure to define those terms too): A Bertrand equilibrium is a Nash equilibrium when firms set prices. Thus, each firm sets its price to maximize profits holding the other firms’ prices constant. Thus, we have a Bertrand equilibrium if no firm has an incentive to unilaterally change its price when it takes other firms’ prices as given. c. Define “Minimum efficient scale”: The smallest level of output where the ATC reaches its minimum. d. True / False / Uncertain. “Subsidizing a monopoly will reduce DWL.” Explain why . Uncertain. Subsidizing the output of a monopoly will increase the quantity produced, which will at least initially bring the quantity closer to the socially efficient quantity (i.e., the perfectly competitive quantity where MC=MB) because monopolies produce less than the socially efficient quantity. Thus initially DWL will be reduced. However, if the subsidy is set sufficiently high, the monopoly will produce more than the socially efficient quantity and this can raise total DWL. Furthermore, in process of raising money to finance the subsidy for the monopoly, the government may create DWL in other markets (e.g. if it uses taxation to raise revenue). This DWL may be larger than the reduction of DWL in the market where the monopoly operates, and total DWL could rise. e. Suppose a monopoly “by accident” operates in the inelastic part of the demand curve. Which is the case: (A) it is maximizing profits; (B) it can it increase profits by producing more; or (C) can it increase profits by producing less? Explain which is the case, and why.

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