101w06homework10-answers

101w06homework10-answers - Economics 101-300 Winter, 2006...

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Economics 101-300 Winter, 2006 Homework Problem Set # 10 1) If the monopolistic firm depicted above is producing at the optimal quantity and price: a) Will the profits for this firm be positive, negative, or zero? Find the profits on the graph. Answer: If the firm is producing at the profit maximizing level they will produce at Q 1 (where MR=MC) and will set price at P 1 (the price people are willing to pay for Q 1 ). At this level, profits will be positive and are found on the graph as the rectangle that represents (P 1 -ATC at Q 1 )*Q 1 . D MR Q 3 P 3 MC ATC Q P P1 P2 Q1 Q2 D MR Q 3 P3 MC ATC Q P P1 P2 Q1 Q2
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2) Here is an example of how a topic addressed in the previous question might be presented as a multiple choice problem: Look at the graph above. What’s wrong with the firm’s decision (out of the following choices) if the firm depicted is a monopolist claiming to be in short run equilibrium with Q 3 and P 3 as its profit maximizing quantity and price? a) The marginal cost curve shouldn’t slope up b) The price is too high and the quantity is too low c) The marginal cost curve shouldn’t cross the ATC at its minimum d) The price is too low and the quantity is too high e) P 3 is correct but the quantity should be Q 1 Answer: d (see graph in answer above) 3) You own a monopoly (a firm, not the board game) and you could sell 4 monopoly houses at a price of $100/unit. In an attempt to increase revenue, you decide to produce 5 houses which you could sell at $80/unit. a) What is your MR at this new level of production? b) If you’re a revenue maximizing monopolist, should you increase, decrease, or keep production the same? Answer: a) When you increase output by one house, there are two effects on total revenue: a positive effect that equals the additional revenue received from the additional unit produced, and a negative effect that equals the reduction in price times the number of units previously produced (because you will have to lower the price on
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This note was uploaded on 04/04/2008 for the course ECON 101 taught by Professor Gerson during the Winter '08 term at University of Michigan.

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101w06homework10-answers - Economics 101-300 Winter, 2006...

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