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Econ100C-Fall2010-Midterm2-sols

# Econ100C-Fall2010-Midterm2-sols - Economics 100C...

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Economics 100C: Microeconomics C Solutions to Midterm 2: Fall 2010 1. (21 pts) A monopolist serves two separate markets and has the long run cost function of  4 CQ Q where Q = q 1 + q 2 . The firm can distinguish between customers in the two markets. Inverse demand in the first market is equal to 11 1 48 D Pq q  . Inverse demand in the second market is equal to 22 2 24 2 D q . The monopolist can charge different prices in each market. a. Assuming no shut down find the monopolist’s profit maximizing prices and quantities in these two markets.     12 2 2 1 2 , 1 2 1 2 max , 48 24 2 4 FOC: 48 2 4 0 22 24 4 4 0 5 48 22 26 24 2 5 14 qq m m m m q q q q p p   b. Suppose the government imposes a price ceiling in this market of p ’, where p ’ is strictly in between the two prices found in part (a). Without doing any additional calculations, what’s the most we can say about the directions of the changes in producer surplus, consumer surplus in market 1 and consumer surplus in market 2? Briefly explain each. The price ceiling will lower the price in market 1 to p ’. It won’t change the price in market 2. Since the monopolist was free to choose p ’ as the original price in market 1 and it actually chose 26, producer surplus must be lower. Consumer surplus in market 1 will increase because price falls and quantity rises. Consumer surplus in market 2 won’t change because neither price nor quantity changes.

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2. (21 pts) A monopolist sells a product in a market with exactly two consumers.
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Econ100C-Fall2010-Midterm2-sols - Economics 100C...

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