Apr 5-6 Practice Problems.pdf

Apr 5-6 Practice Problems.pdf - Econ 281 Practice Session#6...

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Econ 281 Practice Session #6 April 5, 2 - 3 pm, T B 38 April 6, 1 - 2 pm, T B 38 1. A firm is a monopolist in a market. The demand curve for the product is given by P = 20 - 2 Q . Recall that for a demand function given by P = a - bQ , marginal revenue is given by MR = a - 2 bQ . (a) Using only the information given above, what is the lowest possible price the monopolist will choose? Show your work and explain your answer, illustrating your answer with a graph of the demand curve. (b) Now suppose that the firm faces a marginal cost of $2 per unit, and a fixed cost of 30 which is not sunk (this means that the fixed cost does not have to be paid if the firm does not produce anything). How much output does the monopolist produce and what is its price? Show your work and explain your answer. Illustrate your answer with a graph. (c) Is there a deadweight loss from this monopoly? If so, solve for it, and show your work. Identify the deadweight loss on your graph.
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