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Unformatted text preview: AEM 331 Problem Set #4 Due 4/03/09 1. Gil Bates is a monopolist with the total cost function C ( Q ) = 500 + 20 Q . There is a market demand curve Q = 100 P . a. Over what range of output levels does Gils cost function display economies of scale? Over what range of output levels is his cost function subadditive? b. If regulators forced Gil to set his price equal to marginal cost, what is his profit? c. Your answer to part (b) should make Gil pretty upset. Suppose instead that Gil is allowed to set price equal to average cost, with intention of minimizing deadweight loss. Find the price, output, and deadweight loss relative to part (b). d. Suppose that the market demand curve comprises N = 10 consumers, each of whom has identical individual demand curves. Now, let Gil employ a (uniform) two-part tariff. If the usage fee is set equal to marginal cost, what is the largest fixed fee that a consumer would pay for the right to buy at that price? What is the smallest fixed fee that would allow Gil to break even? the smallest fixed fee that would allow Gil to break even?...
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- Winter '08