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ARE100B, assignment 1
Summer Session II, 2009
University of California, Davis
Department of Agricultural and Resource Economics
Assignment 1
(Due Thursday, Aug. 6)
Problem 1:
The demand for a monopolist firm’s production is given as:
Q
D
= 5,000 – 40P.
The firm’s total cost function is given as:
TC = 50Q.
(a) If the firm acts as a monopolist, what price will it firm charge, how much will it produce,
what are monopoly rents, and how much profit will it earn?
(b) Suppose instead the firm acts as a perfect competitor. What price will it charge, how
much will it produce, and how much profit will it earn?
(c) What are the following values when moving to the monopolistic pricing policy from
competition?:
(i) change in consumer surplus.
(ii) change in producer surplus.
(iii) deadweight loss
.
(d) Calculate the ownprice demand elasticity when evaluated at the optimal monopoly
solution? What is the LernerIndex of monopoly power? How are the Lerner Index
and demand elasticity related?
(e) For any single firm in a perfectly competitive market (i.e., part (b) above), what is the
elasticity of demand faced and the Lerner index.
(f)
Graph the monopoly and perfect competition solution
. Show on your graph the prices and
quantities, as well as deadweight loss, monopoly rents and profits.
Problem 2:
The average cost for a typical electricpowerproduction firm is:
ATC = 11,000 – 120Q + Q
2
.
where Q is measured in billion kilowatt hours per day. The inverse demand for electricity is
given as:
P = 60,000 – 900Q.
1
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View Full Document ARE100B, assignment 1
Summer Session II, 2009
(a) Graph the all the relevant curves for a natural monopoly on a single graph (i.e., demand,
MR, MC, and ATC.)
(b) Over what range of quantity does the natural monopoly assumption hold.
(c) Provide answers for each cell in the table below. You don’t need to submit the table with
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This note was uploaded on 08/09/2009 for the course ARE 100B taught by Professor Whitney during the Summer '08 term at UC Davis.
 Summer '08
 WHITNEY

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