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Practice Problems Week 3
Continuing from the example used in section: marginal private beneﬁt is
P
= 12

Q
,
marginal private cost is
P
= 2
Q
, and marginal externality cost is
MEC
= 1
.
5 + 0
.
5
Q
.
1. Suppose the industry is managed by a monopolist. Create a graph for the monop
olist like the one I did in section notes for competition. Recall (or recalculate)
the monopolist equilibrium price and quantity. What is the CS and PS under this
outcome? What is the DWL? Now suppose the goverment uses the regulation you
proposed earlier (tax or subsidy), what is the new CS, PS and govt welfare?
2. Do the same for a monopsonist.
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Solutions
1.
As I did before, monopolist equilibrim is
Q
M
= 3,
P
M
= 9, found by setting MR=MPC.
Consumer surplus:
CS
=
ˆ
3
0
[
MPB
(
Q
)

9]
dQ
, which is just the triangle with a base of 3 and
a height of (12

9). So
CS
=
1
2
·
3
·
3 =
4.5
.
Producer surplus:
PS
=
ˆ
3
0
[9

MPC
(
Q
)]
dQ
, which is the trapezoid with a height of 3 and
bases 9 and (9

2
·
3). If you recall the formula for the area of a trapezoid (
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This note was uploaded on 09/24/2011 for the course ECON C125 taught by Professor Zelberman during the Spring '09 term at University of California, Berkeley.
 Spring '09
 ZELBERMAN

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