Intermediate Microeconomics: A Modern Approach, Seventh Edition

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Unformatted text preview: -30-20-1010203040506070809048 12 16 20 24 28 32 36 40 44 48 52 56 60 64 68 72 76 80 84x$atcmcdemandmrADCBPsmxmesEcon 301 F07PROBLEM SET 7 Due Wednesday Dec 5 by noon at Jiyoun's Uris Hall officeWissink1.You are given the following information about a monopolist who makes gizmos: the monopolists production function x=L1/2 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 $1/hour; and market demand isXD= 120 2P.a.What are the values for the simple monopoly equilibrium; that is what are xSM, PSM, profitSM, Net Social SurplusSM, Consumers SurplusSM, Producers SurplusSMand dead-weight-lossSM?b.Graph this solution.[ANSWER]tc(x) = x2+16atc(x) = x+16/xmc(x) = 2xDemand curve : XD= 120 2P P=60-1/2xtr(x) = (60-1/2x)x = 60x-1/2x2mr(x) = 60 xMaximize profit : set mr(xSM)=mc(xSM) 60-xSM =2xSMxSM = 20PSM = 60-1/2xSM = 50profitSM = 50*20 (20*20+16) = 584NSSSM= area OBCD = 60*24*1/2-20=700CSSM= area PSMBC = (60-50)*20*1/2=100PSSM= area OPSMCD = 700-100=600DWLSM= areaDCA = (50-40)*(24-20)*1/2=20c.Is the monopolist productively efficient? Defend.[ANSWER]No! xSMis not at the minimum of the lratc curve. However, if you want to argue that the rising part of the lratc makes no sense since the firm would replicate beyond xMESthen I would accept yes as an answer, provided you provided that proviso!d.Is the monopolist allocatively efficient? Defend.[ANSWER]No! x* = 24maximizes Net Social Surplus.2.In a diagram using typical cost curves and a linear market demand curve, show how a PRICE CEILING can be successfully used to get a simple monopolist to put more on the market and sell it at a lower price.[ANSWER]mrmcq$CqSMPSMDmktPCqCDNEWmrABEFGSuppose PCis a price ceiling that the government slaps on the market. A simple monopolists new marginal revenue curve is the red line, PCCFD. The monopolist produces qCwith the lower price, PC, the price ceiling. Also, consumer surplus increases from PSMAB to PCAC and the dead-weight-loss decreases from GBE to FCE. Note that the efficient price ceiling would be at the price indicated by point E.3.In a diagram using typical cost curves and a linear market demand curve, show how a PER UNIT TAX ON THE MONOPOLISTS 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.[ANSWER]2After a per unit tax, t, is levied on the monopolists output, atc, avc, and mc shift up and mc shifts up by exactly t(the per unit tax). A per unit tax will cause a monopolist to reduce the profit maximizing quantity from qSM to qtand raise price from PSM to Ptfor simple monopolist. The profit for the firm decreases since it was maximized before, so by revealed profit analysis, profit must be less at this combinationnote the monopolist could have selected this quantity before but did not. combinationnote the monopolist could have selected this quantity before but did not....
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This homework help was uploaded on 02/01/2008 for the course ECON 3010 taught by Professor Wissink during the Fall '07 term at Cornell University (Engineering School).

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ans to problem set7 f07 - -30-20-1010203040506070809048 12...

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