ps2_sol1 - Solutions to Practice Problem Set 2 ECON 100C...

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1 Solutions to Practice Problem Set 2 ECON 100C Perloff Chapter 11 10. Describe the effects on output and welfare if the government regulates a monopoly so that it may not charge a price above ݌ҧ , which lies between the unregulated monopoly price and the optimally regulated price (determined by the intersection of the firm’s marginal cost and the market demand curve). Since the monopolist cannot charge more than ݌ҧ , its regulated demand curve is horizontal at ݌ҧ for prices equal or above ݌ҧ and is the same as the market demand for lower prices. The marginal revenue curve under regulation is horizontal at ݌ҧ where the regulated demand curve is horizontal, and is equal to the original marginal revenue elsewhere. The monopolist will produce quantity ݍ that is greater than the quantity produced without regulation but still less than the optimal perfect-competition output. Welfare increases relative to the unregulated monopoly, but there is still a deadweight loss. 20. A country has a monopoly that is protected by a specific tariff, , on imported goods. The monopoly’s profit-maximizing price is p*. The world price of the good is w p , which is less than p*. Because the price of imported goods with the tariff is w p , no foreign goods are imported. Under WTO pressure the government removes the tariff so that the supply of foreign goods to the country’s consumers is horizontal at w p . Show how much the former monopoly produces and what price it charges. Show who gains and who loses from removing the tariff. Foreign imports impact the demand curve the firm faces in much the same way demand is impacted by government price regulation (discussed in section 11.7). The monopoly cannot charge more than the world price, so the demand curve it faces is horizontal at the world price and is equal to the local demand curve at lower prices. Since the world price is lower than the monopoly price under autarky, the removal of the tariff leads to lower prices in the local market. Lower prices and greater quantity mean that consumer surplus increases. The monopolist must be worse off at the new price (since she could have charged the new price before trade, but did not), so producer surplus is lower. 25. If the inverse demand function facing a monopoly is P(Q) and its cost function is C(Q), show the effect of a specific tax, , on the monopoly’s profit-maximizing output. How does imposing affect its profit?
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2 The profit function and first order condition (FOC) with a specific tax are as follows:  () :( ) 0 ( ) ( ) pQ Q CQ Q dC Q dd p Q FOC p Q Q dQ dQ dQ MR Q MC Q        So the effect of the tax is to effectively increase the MC by the amount of the tax per unit.
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This note was uploaded on 10/21/2010 for the course ECON 1530 taught by Professor Ohly during the Spring '10 term at Dartmouth.

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ps2_sol1 - Solutions to Practice Problem Set 2 ECON 100C...

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