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Unformatted text preview: 1/7 METU Department of Economics Econ 101 Sections 01 – 02 – 03 Fall 2011 PROBLEM SET # 8 (with Answers) (Chapters 12 & 13) PART A – PROBLEMS: 1. A monopoly’s cost and revenue structure is given below: Q P = AR TR MR TC MC PROFIT 0 51 4 1 46 34 2 41 59 3 36 80 4 31 96 5 26 114 6 21 135 7 16 160 8 11 189 9 6 222 10 1 259 a) Fill the blank cells. b) Monopoly’s equilibrium price is __ . c) Monopoly’s equilibrium quantity is __ . d) Profit/Loss at equilibrium is __ . e) Show equilibrium price, quantity and profit/loss on the relevant diagram(s). 2. A monopolist’s average revenue function: P = 120 – 2Q It also knows that its fixed cost is 100. The AVC is represented as AVC = 60 + 2Q a) Find the total revenue (TR) function. b) Find the MR and MC function. c) Find the quantity that gives the maximum TR. d) Find the quantity that gives the minimum AC. e) Determine the profit maximizing level of output and find the profit. 2/7 f) What would the profit maximizing level of output be if this market is perfectly competitive? g) What is the cost of monopoly to the society? Show this on a graph. You are a self-employed consultant specialized in monopolies. Three firms are currently seeking your advice. Select one of the following recommendations for each firm in the short run. a) Remain at the current output level. b) Increase output. c) Decrease output. d) Shut down. e) Go back and recalculate your figures because the ones supplied can’t possibly be right. Firm P MR TR Q TC MC ATC AVC Recommendation A 3.90 3.00 2,000 7,400 2.90 3.24 B 5.90 10,000 5.90 4.74 4.24 C 9.00 44,000 4,000 9.00 11.90 10.74 3. State whether the followings are true or false a) In the short run a pure monopolist always earns an economic profit. b) To maximize profits a pure monopolist must maximize the difference between total revenue and total cost. c) If a monopolist engages in perfect price discrimination, it will charge a higher price where individual demand is elastic and a lower price where individual demand is inelastic. d) Price discrimination occurs only when a producer charges different prices for different units of the same product for reason not associated with differences in cost....
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