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Econ 302 Solution to Problem Set 13
Spring 2010Ali Toossi
Due: Wednesday May 5 at the beginning of the class
Chapter 12: Questions for review
Answer to question 2.
Yes if the transportation costs of cement from the next town make the competing cement more
expensive than the monopoly price of the local cement.
Answer to question 4.
On the inelastic portion of the curve, raising price will always increase revenue and (since output
will be lower) it also lowers costs. Therefore the firm should always move up the demand curve
to where it is not inelastic if profit maximization is a goal.
Answer to question 8.
The pricequantity pair that maximizes profits will also maximize the profits minus a lump sum
tax. Such a tax is equivalent to any other fixed cost since it leaves the optimal pricequantity pair
unaffected so the question is false.
Chapter 12: Problems
Answer to problem 1.
1)
Increase output because MR > MC and P > AVC.
2) Reduce output because MR < MC (we know that MR < P and P = MC here).
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 Spring '09
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