Econ170SQ1FALL07(3)

# Econ170SQ1FALL07(3) - Economics 170 E McDevitt Study...

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Economics 170 E. McDevitt Study Questions-Set #1 1. Assume the following inverse demand function: P = 200 – Q. Marginal cost is constant at 60 and fixed costs are zero. a. Find monopoly output and price, competitive output and price, consumer and producer surplus under each situation and calculate the deadweight loss of monopoly. Find the value for the Lerner index. Show results on a graph. b. Suppose the demand curve becomes more elastic—P = 130 –0.5Q. Find monopoly DWL and calculate the Lerner index. Use a graph to compare the DWL triangles for each demand curve. c. It has been argued that the traditional deadweight loss triangle underestimates the efficiency loss caused by monopoly due to rent-seeking behavior. Explain. 2. a. Using a graph, show how two monopolies with the same output, price, profit and the same markup (Lerner index) can have different DWLs. b. Suppose there are the two monopolies: Monopoly A faces a low demand of P = 10 – Q and MC = 0. Monopoly B: P = 1000 – Q and MC = 400. Which monopoly has the highest Lerner index? Which monopoly has the more harmful monopoly effect (DWL)? What does this imply about the Lerner index as a measure of the harmful effects of monopoly? 3. Suppose that you are attempting to determine if an industry is competitive or if it is one that has market power. You are unable to calculate MC so you cannot directly observe if P = MC or if P > MC. However, you have strong reasons to believe that MC is constant. Suppose the demand for the product rises. How can you use this event to determine if the industry is competitive or not? Use a graph to justify your answer. 4. Suppose through a series of mergers that a competitive industry is converted into a monopoly. Assume that MC is lower under monopoly. Does the monopolization of this industry necessarily result in a deadweight loss? Does it necessarily result in a higher price for consumers? 5. Suppose total cost function for any given firm is TC = 100 + 2Q. What sort of industry structure would you expect given this type of cost function? Why? 6. Natural monopolies are typically subject to regulation. What is MC-pricing and what problems does it lead to? What AC-pricing and what problems does it lead to? 7. Suppose a local government decides to auction off the right to be the exclusive cable TV provider in the city. It must choose between two types of auctions: a. An auction that calls for lump-sum bids with the high bidder winning or b. An auction in which the winning bidder is the firm who offers to provide the cable service (of a given quality) at the lowest P. Both auctions are competitive. In terms of efficiency, does it matter which auction format is selected? 8. Firm A is the dominant firm in an industry consisting of

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Econ170SQ1FALL07(3) - Economics 170 E McDevitt Study...

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