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ProbSet2Ans

# ProbSet2Ans - AEM 331 Suggested Answers to Problem Set#2 1...

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AEM 331 Suggested Answers to Problem Set #2 1. a. From the two points on the demand curve that we’re given, we know inverse demand is: P = 300 – 4*Q. Under competition, consumer surplus is (50*200)/2 = 5000. Under monopoly, consumer surplus is (45*180)/2 = 4050. So, competition’s consumer surplus is 950 higher. b. Under competition, producer surplus would be zero. Under monopoly, producer surplus is (120-60)*45 = 2700. c. The Planning Commission would choose monopoly since total surplus is higher (compare 6750 to 5000). 2. As we discussed in class, this is really ambiguous. Breaking it down between the two extremes of perfect competition and monopoly, we could argue that incentive is higher for either depending on circumstances. For monopoly, the incentive can be higher if a fringe firm can take control of the industry by innovating before the monopolist. For competition, the short-term gain is higher from jumping ahead of opponents if the monopoly is only effectively competing with itself. 3. a. P = MC, so 70 – 2 Q = 10. Therefore, Q = 30, P = 10.

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