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# answers.test1.fall2006 - Answers to ECMC02 First Test 1...

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cost of these taxi rides will be 4000 x \$35 = \$140,000. The net amount of deadweight loss is therefore \$110,000. The correct answer is (U). 6. If demand is P = A – bQ, then MR = A – 2bQ. MC = dTC/dQ = c. The monopoly firm will profit-maximize by setting A – 2bQ = c, so the equilibrium quantity traded will be Q* = (A-c)/2b. The profit- maximizing price will be given by substituting this into the demand curve, so P* = A – b((A-c)/2b) = A – A/2 + c/2 = A/2 + c/2 = (A + c)/2. The correct answer is (F). 7. The amount of deadweight loss is given by comparing the monopoly result with the perfectly competitive result. The perfectly competitive result would be where P = MC or A – bQ = c, or Q = (A – c)/b. The amount of lost production due to monopoly is therefore (A – c)/b – (A – c)/2b. The amount of deadweight loss is [(A + c)/2 – c] x [(A – c)/b – (A – c)/2b]/2 = [(A - c)/2] x [(A – c)/2b]/2 = (A – c) 2 /8b. The correct answer is (C). 8. If b were twice as large, the denominator would be multiplied by 2.
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answers.test1.fall2006 - Answers to ECMC02 First Test 1...

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