Ans_Practice+Homework8

# Ans_Practice+Homework8 - b) Again, the monopoly midpoint...

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1. Suppose a monopolist faces demand 200 5 d Q P = - and has a constant marginal cost of \$5. a) What price should the monopolist charge to maximize its profits? b) What is the Lerner Index of Market Power for this monopolist? a) To find the profit-maximizing price, set MR MC = . 200 5 5 200 40 0.20 40 0.40 40 0.40 5 87.5 Q P P Q P Q MR Q Q Q = - = - = - = - - = = At 87.5 Q = , the monopolist will charge a price 40 0.20(87.5) 22.50 P = - = . b) To calculate the Lerner Index, calculate 22.50 5 22.5 0.78 P MC L P L L - = - = = 2. A monopolist faces a demand curve with a choke price of \$100 and the monopolist has a constant marginal cost of \$20. a) What price should the monopolist charge to maximize profit? b) Suppose the demand curve shifts parallel upwards by \$20. By how much would we expect the monopolist to increase its price to continue maximizing profit?

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a) The monopoly midpoint rule tells us that the profit-maximizing monopolist will charge a price halfway between the choke price and the constant marginal cost, in this case \$60.

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Unformatted text preview: b) Again, the monopoly midpoint rule applies. Since the monopolist will charge a price halfway between the choke price (which has risen \$20) and the constant marginal cost, the monopolist will be induced to raise price by one-half the amount of the shift in demand or \$10, to \$70. Use the following diagram to answer the next five questions 3. The profit-maximizing price for a perfectly competitive firm would be a) 180 b) 210 c) 240 d) Between 210 and 240 Ans: B 4. The profit-maximizing price for a monopolist would be a) 180 b) 210 c) 240 d) Between 210 and 240 Ans: C 5. The total economic benefit under perfect competition would be a) 2,700 b) 1,350 c) 675 d) 500 Ans: B 6. The total economic benefit under monopoly would be a) 300 b) 600 c) 900 d) 1,200 Ans: D 7. The deadweight loss under monopoly would be a) 75 b) 150 c) 225 d) 300 Ans: B...
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## This note was uploaded on 01/30/2011 for the course 730 368 taught by Professor Bryant during the Spring '08 term at Rutgers.

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Ans_Practice+Homework8 - b) Again, the monopoly midpoint...

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