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Problem Set 8 - Econ 221 Key to Practice Problem Set...

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Econ. 221 Key to Practice Problem Set 8 (Chapter 12) 1. Revenue Maximization and Elasticity Use the table below to answer the following: Total Marginal Quantity Price Revenue Revenue 1 35 35 35 2 32 64 29 3 29 87 23 4 26 104 17 5 23 115 11 6 20 120 5 7 17 119 -1 8 14 112 -7 9 11 99 -13 10 8 80 -19 b. If the firm wants to maximize its revenue, how many units of its product should it sell and at what price? P = $20; Q = 6 c. Over what range of the demand curve is demand price elastic? Between P =$35 and P=$20 d. Over what range of the demand curve is demand price inelastic? Between P =$17 and P=$8 e. Can you identify the profit maximizing output level? No, we do not have information on MC. 2. What is the excess capacity theorem? How does it affect consumer utility? Answer: See Study Supplement, page 79 3. Are economists concerned about the welfare loss from monopolistic competition? Explain your answer. Answer: See Study Supplement, page 79 4. In monopolistic competition firms earn zero profit in the long run. If, however, the firms could collude, they may reap positive profits. Explain why collusion is not possible in monopolistically competitive markets.
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