Principles of Economics

Principles of Economics - 2a. Dr. Zuss Inc is the only firm...

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2a. Dr. Zuss Inc is the only firm that produces frozen packages of "green eggs and ham." Currently green eggs and ham are produced at a constant marginal = average cost of $2 per package. Demand is given by Q = 4000 - 200P, where Q is number of packages per week and P is price per package in dollars. If Zuss behaves as a monopolist, what price, output, and economic profit do you anticipate? If Zuss produces at price = marginal cost, what price and output do you predict? What difference in consumers' surplus do you attribute to the movement from monopoly pricing to marginal cost pricing? This is the deadweight loss of monopoly. Given: $2/package Q = 4,000 – 200P P = 0 Q = 4,000 Q = 0 P = 20 Marginal revenue = P x ½Q P = 20 – 1/200Q MR = 20 – 2/200Q 20 – 1/100Q = 2 Q = 1800 20 – 1800 / 200 20 – 9 = 11 P = 11 Profit = total revenue – total cost ; (P – AC) x Q 11 x 1800 – 2 (1800) 9 x 1800 = 16,200 Monopolist output: 1,800 packages Monopolist price: $11 Monopolist economic profit: $16,200
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This note was uploaded on 10/20/2010 for the course ECON 011 taught by Professor Yezer during the Fall '07 term at GWU.

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Principles of Economics - 2a. Dr. Zuss Inc is the only firm...

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