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Eco 304 mt3 pastel fall 2011c_edit

Eco 304 mt3 pastel fall 2011c_edit - 1 Midterm 3 Economics...

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Midterm 3: Economics 304k (Sibley) Pastel Version December 2, 2011 Directions: 1. Observe the Honor Code. 2. There are five questions. Do all five . 3. Each counts 20 points. 4. Do all your work on the exam. 5. Don’t start until told to do so. 1
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1. Suppose that the widget market has the demand curve P = 200 – 20Q. It is perfectly competitive, and each firm has a marginal cost of 20, with zero fixed costs. (a) What is the perfectly competitive output? (b) Suppose that the widget industry becomes monopolized. What are the monopoly output and price? (c) Using a diagram, show the geometric areas corresponding to consumer surplus and producer surplus. Include in the diagram the numerical results you got above (don’t calculate the actual surpluses). (d) Suppose that the government wants to tax away all the monopolist’s profits and give the money to consumers so that they will be just as well off as when the industry was perfectly competitive. If the monopoly is to be left with a non- negative profit net of the tax, is this goal possible to achieve?
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