Economics 101
Fall 2007
Answers to Homework #5
Directions:
The homework will be collected in a box before the lecture. Please place
your name
,
TA name
and
section number
on top of the homework (legibly). Make sure you write your name
as it appears on your ID so that you can receive the correct grade. Please remember the section
number for the section
you are registered,
because you will need that number when you submit
exams and homework. Late homework will not be accepted so make plans ahead of time. Good
luck!
1.Suppose that the popcorn market is currently a monopoly. In this market, the monopolist’s
marginal cost curve is given by the equation MC=2Q+8. The monopolist’s demand curve is
given by the equation P=563Q.
a) If this monopolist acted as if it were a perfectly competitive firm in a perfectly competitive
industry, what would the market price and quantity equal? What would the value of consumer
surplus equal if this firm acted as if this was a perfectly competitive industry? What would the
value of
producer surplus equal if this firm acted as if this was a perfectly competitive industry?
[Hint: the numbers for this problem are a bit challenging…you may want to pull out your
calculator for this one!]
In the competitive equilibrium, MC=P. Therefore, 2Q+8=563Q. So Q=9.6, P=27.2.
CS=(5627.2)*9.6/2=138.24; PS=(27.28)*9.6/2=92.16.
b) Suppose this monopolist acts as a monopolist. What is the monopolistic price and quantity in
the popcorn market? Calculate the value of consumer surplus, producer surplus and dead weight
loss for this monopoly.
The optimal quantity of the monopolist satisfies MC=MR. Here, MR=566Q. Therefore
2Q+8=566Q. So Q=6, P=38.
DWL=(9.66)*(3820)/2=32.4(calculate the area of the triangle directly).
c) Suppose this monopolist knows what the maximum price each consumer of popcorn is willing
to pay for popcorn and is therefore able to practice first degree price discrimination. What is the
monopolist’s profit equal to when it practices first degree price discrimination.
The profit is the total surplus of the society in part (a) which is 138.24+92.16=230.4.
2. Suppose a market has a single producer and that this producer is able to distinguish two types
of customers, Group A and Group B (such as men and women, or young and adult).
Group A’s
demand curve is P = 16 – 3Q, and Group B’s demand curve is P = 10 – Q.
In both markets,
MC=ATC=4.
a) If the monopolist is required to charge the same price to the two groups of people, what is the
best output level and price? What is the profit for this single price monopolist? [Hint: to find
these answers you will need to find the market demand curve: this will entail the horizontal
summation of the demand curves for the two groups.]
The coordinates of the kink is P=10, Q=2, that of the lower ending point is P=0, Q=46/3.
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 Fall '07
 Hansen
 Economics, Microeconomics, Supply And Demand, producer, player

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