econ100_winter2010_ps8ans

econ100_winter2010_ps8ans - Answers to Problem Set 8 1 We...

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Answers to Problem Set 8 1. We know that marginal revenue may be expressed as a function of the elasticity of demand: ) 1 1 ( P MR . We also know that a monopolist will produce where MR = MC. Combining these two facts gives us: ) 1 1 ( P MC . If the elasticity of demand is between 0 and -1, then the fraction in the previous equation must be greater than 1. This means that the entire expression on the right-hand side will be negative. This implies that the monopolist would produce where MC are negative. Since marginal costs of production cannot be negative, we cannot have monopoly production when the elasticity is in this range. 2. a. This is a case where 3 rd degree price discrimination is possible because of the separate demand functions. Geographic separation means that resale will not be possible (or will be difficult). Because marginal costs are constant at 3, we simply need to find where MR1=MR2=MC.
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econ100_winter2010_ps8ans - Answers to Problem Set 8 1 We...

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