17-Discussion Questions

# 17-Discussion Questions - Lecture 17 Monopoly Suggested...

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Lecture 17: Monopoly Suggested questions and exercises (Pindyck and Rubinfeld, Ch.10). Questions: 1, 2, 3 ,5 Exercises: 6, 8, 9, 11, 15, 16 Additional Discussion Question (Based on Past Midterms and Finals). QUESTIONS 1. A monopolist is producing at a point at which marginal cost exceeds marginal revenue. How should it adjust its output to increase profit? 2. We write the percentage markup of prices over marginal cost as (P - MC)/P. For a profit-maximizing monopolist, how does this markup depend on the elasticity of demand? Why can this markup be viewed as a measure of monopoly power? 3. Why is there no market supply curve under conditions of monopoly? 5. What are some of the different types of barriers to entry that give rise to monopoly power? Give an example of each. EXERCISES 6. Suppose that an industry is characterized as follows: C 100 2 Q 2 Firm total cost function MC 4 Q Firm marginal cost function P 90 2 Q Industry demand curve MR 90 4 Q Industry marginal revenue curve. a. If there is only one firm in the industry, find the monopoly price, quantity, and level of profit. b. Find the price, quantity, and level of profit if the industry is competitive. c. Graphically illustrate the demand curve, marginal revenue curve, marginal cost curve, and average cost curve. Identify the difference between the profit level of the monopoly and the profit level of the competitive industry in two different ways. Verify that the two are numerically equivalent. 8. A firm has two factories for which costs are given by: Factory #1 : C 1 Q 1 = 10Q 1 2

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Factory #2: C 2 Q 2 = 20Q 2 2 The firm faces the following demand curve: P = 700 - 5Q where Q is total output, i.e. Q = Q 1 + Q 2 .
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