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Econ_274_Fall_2011_PS_2

Econ_274_Fall_2011_PS_2 - n identical firms in a market...

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Econ 274 Fall 2011 Problem Set 2 Glandon Due: Wednesday, September 28 by 5:00 PM 1. If monopolies are always bad, why does the government award firms with monopolies (such as for public utilities and patents)? 2. What would a monopoly’s marginal revenue be if it chose a point on the demand curve where the price elasticity of demand equals -1? Why would it never be optimal to choose such a point, given positive marginal costs? Would the monopoly rather produce less or more? 3. If a single firm with constant marginal costs of $8 monopolizes a market with demand Q = 100 - 2 p , how large is the deadweight loss from monopoly? How large is the additional social loss if, in order to obtain the monopoly, the firm spent an amount equal to half of its current profits?
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Unformatted text preview: n identical firms in a market belong to a cartel, how much total output will be produced relative to the monopoly output, and how much will each firm produce? 5. Can the combined profits of oligopolistic firms ever be higher than those of a monopoly with the same costs as those of the firms combined? 6. An industry consists of three firms with identical costs (±) ² ³´± µ ± ¶ . Market demand is ·(¸) ² ³¹º » ¸¼ . a. What is the industry equilibrium (price, output and profits) if the firms have Cournot beliefs? b. Would it pay for Firm 1 and Firm 2 to merge, if, after the merger, the remaining firm plays Cournot? ( Hint : carefully consider if the merged firm would produce using both original firms’ plants or just those of one firm.)...
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