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hw2 - PADP 8670 Fertig Homework 2 Due 1 Answer the...

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Unformatted text preview: PADP 8670 Fertig Homework 2 Due August 29, 2011 1. Answer the following questions with reference to the diagram below and its labels. It shows the demand curve for a firms' product, the marginal revenue curve, and the constant marginal cost curve (which is equal to the average cost curve). Fall 2011 UGA P Demand MR A B C MC=AC D E F G Q a. Identify the price and quantity at the profit maximum. Explain why it is the profit maximum. b. Identify the price and quantity where the revenue is at its maximum. Explain why it is the revenue maximum. c. Identify the efficient quantity. Explain why it is the efficient quantity. d. Explain which is more inefficient: the quantity in your answer to a or to b? 2. Napster, the online file-swapping service, allowed people to use the internet to download copies of their favorite songs from other people's computers without cost. In what sense did Napster enhance economic efficiency in the short-run? In what sense might Napster have reduced economic efficiency in the long-run? Why do you think the courts eventually shut Napster down? 3. A monopolist's demand and marginal revenue is as follows below. The monopolist's marginal cost is $20 for every unit produced. Calculate the monopolist's output, price, profit, consumer surplus, and the deadweight loss to society. Also, draw the solution graphically. P = 160 - 2Q MR = 160 4Q 4. Now assume that a new market emerges for the monopolist described in problem 3 to enter. Assume that the monopolist is able to separate the new market from the market described in problem 3, and thus price discriminate. The monopolist's demand and marginal revenue for the new market is as follows below. Calculate the output, price and profit derived from the new market. Also compute the additional consumer surplus generated from the monopolist entering the new market. Draw the solution graphically as well. Pnew = 80 (1/2)Qnew MRnew = 80 Qnew 5. Finally, assume that the monopolist is not able to keep the markets separate due to Internet sales across the geographical areas. Thus, the firm can no longer price discriminate across the markets. The new demand curve that the firm faces is a combination of the two demands from the two markets, as shown below. Re-calculate the monopolists' output, price, profit if price discrimination is no longer possible. Draw this solution graphically as well. P = 160 - 2Q & MR = 160 4Q if P 80 P = 96 (2/5)Q & MR = 96 (4/5)Q if P 80 6. Calculate the consumer surplus changes (in each market and combined) across the 3 different scenarios described in problems 3, 4, and 5. For each change, discuss whether this is what we expect given the general economic theory about price discrimination. 7. Read Simon and Gruber (2008) and write a one page summary. ...
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