PS10Sol - Econ 301 Intermediate Microeconomics Prof Marek...

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Econ 301 Intermediate Microeconomics Prof. Marek Weretka Solutions to problem set 10 (due Thursday, April 26th, before class) Problem 1 (Why monopolies exist) Nuclear Power Plant - large °xed costs Vista (Microsoft operating system) - patent Casinos - a legal °at Niagara Falls State Park - a sole owner of the waterfalls Problem 2 (Monopoly) a) Total gains to trade are GTT = 1 2 ° 100 ° 100 ± F = 5000 ± 1000 = 4000 Competitive producer sets the price to be equal to marginal cost p = MC = 0 and hence CS = 5000 and PS = ± 1000 Note that with price equal to zero °rm has negative pro°t therefore it should exit the industry. The answer where the °xed cost was not subtracted is also correct. In such case F is considered as a sunk cost. b) The total revenue is given by TR ( y ) = 100 y ± y 2 therefore marginal revenue is MR ( y ) = 100 ± 2 y Since marginal cost is zero, optimal production is y = 50 p = 100 ± 50 = 50 ° = 50 ° 50 ± 1000 = 1500 c) Such outcome is not Pareto e¢ cient. DWL is DWL = 1 2 ° 50 ° 50 = 1250 d) Consumer±s surplus is given by CS = 1 2 ° 50 ° 50 = 1250 1
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