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EC 360 PS#2 - Nick Calkins A37632942 Problem Set#2 1 If...

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Nick Calkins A37632942 Problem Set #2 1) If Monopoly Air is in fact a natural monopoly, why would another firm (Upstart Airways) enter the market? In a natural monopoly it is cheaper for a single firm to produce rather than using two or three firms. To determine if this market is actually a natural monopoly, analysis of cost relative to demand would be needed. If Monopoly Air were able to provide for the demand of the market with lower costs than multiple firms then it would be considered a natural monopoly. 2) a) The Lerner Index is unable to exceed one (1) because even when marginal cost is zero, (P-0)/P=1. If marginal cost is greater than zero, then LI will start to decrease. b) The minimum demand elasticity observed for a monopolist is 1. (The lerner Index is the inverse of the firm’s demand elasticity: LI = 1/Ed 3) No, the consultant is not a good economist. He is confused between sunk costs and fixed costs. The cost of running a car for one trip is a sunk cost which cannot be retrieved.
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