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problem7 301 f07

# Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Econ 301 – F07 PROBLEM SET 7 – Due Wednesday Dec 5 by noon at Jiyoun's Uris Hall office Wissink 1. You are given the following information about a monopolist who makes gizmos: the monopolist’s production function x=L 1/2 where L is measured in hours; the firm must get a permit to operate and the cost of the permit is \$16; the current market wage rate is \$1/hour; and market demand is X D = 120 – 2P. a. What are the values for the simple monopoly equilibrium; that is what are x SM , P SM , profit SM , Net Social Surplus SM , Consumers’ Surplus SM , Producer’s Surplus SM and dead-weight-loss SM ? b. Graph this solution. c. Is the monopolist productively efficient? Defend. d. Is the monopolist allocatively efficient? Defend. 2. In a diagram using typical cost curves and a linear market demand curve, show how a PRICE CEILING can be successfully used to get a simple monopolist to put more on the market and sell it at a lower price. 3. In a diagram using typical cost curves and a linear market demand curve, show how a PER UNIT TAX ON THE MONOPOLIST’S OUTPUT will alter the profit maximizing quantity and price for simple monopolist. Show how the economic price incidence of the per unit tax is shared (or not) between the buyers and the monopolist. 4. Prove that a monopolist will never choose to operate in the inelastic portion of his demand curve if he is a simple profit maximizing monopolist. 5. In a diagram using typical cost curves and a linear market demand curve, demonstrate that a simple monopolist who is profit maximizing and at the same time earning zero economic profit must be producing less output than is productively efficient.

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