# tema1extra - Monopoly Additional exercises Microeconomics 2...

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Monopoly Additional exercises Microeconomics 2 - R´ obert Veszteg 1. (Pindyck-Rubinfeld: 10.4.) A firm faces the following average revenue (demand) curve: : P = 100 - 0 . 01 Q where Q is weekly production and P is price, measured in cents per unit. The firm’s cost function is given by C = 50 Q + 30 , 000. Assuming the firm maximizing profits, (a) What is the level of production, price, and total profit per week? (b) The government decides to levy a tax of 10 cents per unit on this product. What will the new level of production, price, and profit be as a result? 2. (Pindyck-Rubinfeld: 10.13.) Cu˜nas Dom´ ınguez, S.A. (CD) is a monopolist in the industry of wedges that help to keep doors open. Its cost function is C = 100 - 5 Q + Q 2 and faces the following demand: P = 55 - 2 Q . (a) What price should CD fix in order to maximize profits? What is the corre- sponding quantity? How much are CD’s profits and the consumers’ surplus generated by CD? (b) How much would CD produce if it were operating on a competitive market, and would equal CM to P ? How much are CD’s profits and the consumers’ surplus generated by CD in this case? (c) How large is the deadweight loss generated by the market power of the monopoly in point ( a )? (d) Suppose that the government, worried about the high price of wedges, fixes a maximum price at \$27. How does this measure affect the price, quantity, the consumers’ surplus and CD’s profits? How much is the resulting deadweight loss? 3. (Pindyck-Rubinfeld: 10.15.) A monopolist faces the following demand curve: Q = 144 /P 2 where Q is the quantity demanded and P is price. Its average variable cost is AV C = Q 1 2 and its fixed cost is 5. 1

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(a) What are its profit-maximizing price and quantity? What is the resulting profit? (b) Suppose the government regulates the price to be no greater than \$4 per unit. How much will the monopolist produce, and what will its profit be?
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