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solutions_problem set III_essays (1)

# solutions_problem set III_essays (1) - Answer Key Testname...

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Answer Key Testname: PROBLEM SET 3_SPRING2011 21) a. Without regulation we would expect the firm to behave as a monopolist, equating MR and MC. 28 - 0.0016Q = 0.0012Q Q = 10,000 P = 28 - 0.0008(10,000) P = \$20 b. Economic theory suggests that price should be equal to MC to achieve allocative efficiency. P = 28 - 0.0008Q MC = 0.0012Q 28 - 0.0008Q = 0.0012Q 28 = 0.002Q Q = 14,000 P = 28 - 0.0008(14,000) P = 28 - 11.20 P = 16.80 c. In (a), the price is higher (\$20 as opposed to \$16.80), and quantity lower (10,000 as opposed to 14,000). The monopolist's higher price and smaller quantity result in a deadweight loss as shown below. 7

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Answer Key Testname: PROBLEM SET 3_SPRING2011 22) If Jeremy's marginal costs are constant at \$50, he should charge \$65 per rental. 23) Hawkins will set marginal revenue equal to marginal cost to find optimal output. MR ( Q ) = 50 - Q = MC ( Q ) = 5 + 1 2 Q Q = 30. At this output level, Hawkins charges \$35 per unit. The choke price is \$50 while Hawkins reservation price is \$5. Consumer surplus is CS = 1 2 (50 - 35)30 = 225. Producer surplus is PS = 0.5(20 - 15)(30) + (35 - 20)(30) = 675. Total surplus in the local Oatmeal Stout market is \$900 when Hawkins has monopoly power. If Hawkins did not have
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solutions_problem set III_essays (1) - Answer Key Testname...

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