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ps8_fall11 - Department of Economics Columbia University 1...

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Department of Economics W3211 Columbia University Fall 2011 Probl e m S e t 8 Int e rm e diat e Mi c ro ec onomi c s Prof . S e yhan E Arkona c 1 . Consider a town with a single movie theater, and that movie theater faces a downward sloping demand curve for its tickets. The movie theater has a fixed number of seats available for each show but the marginal cost of filling a seat is zero. Why might it be in the movie theater’s interest to not to sell out every show even though the marginal cost of selling additional seats is virtually zero? (A graph will help your answer). 2 . A monopolist faces the (inverse) demand for its product: p = 50- 2Q. The monopolist has a marginal cost of 10/unit and a fixed cost given by F. (a) Assume that F is sufficiently small such that the monopolist produces a strictly positive level of output. What is the profit-maximizing price and quantity. (b) Compute the maximum profit for the monopolist in terms of F. ( c ) For what values of F will the monopolists profit be negative 3 . For profit-maximizing monopolies, explain why the boundaries on the Lerner Index are 0 and 1.
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