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week4_handout

# week4_handout - Econ 101 Microeconomic Theory Professor...

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Econ 101 Microeconomic Theory Professor Jernej Copic Handout for TA section: week 4 Hyo Sang Kim 1. Suppose monopoly market has a demand function as following. Q = 20 P The monopolistic firm’s cost function is a constant function C = 5 . (a) What price will the profit maximizing firm choose? What market output will this yield? Solution: Profit for the firm is given by max p π = P × Q C × Q = ( P 5) × (20 P ) = P 2 + 25 P 100 The first order condition is d π dP = 2 P + 25 = 0 Thus, P = 12 . 5 and Q = 7 . 5 . (b) What will be the consumer’s surplus? What will be the monopolistic firm’s surplus? Solution: Consumer’s surplus is 1 2 × 7 . 5 × 7 . 5 = 28 . 125 . The firm’s surplus is 7 . 5 × 7 . 5 = 56 . 25 . (c) Is this Pareto efficient? If not, how to recover Pareto efficient? Solution: No, there is deadweight loss (market failure of monopoly). (Perfect) Price discrim- ination would be one way that recover Pareto efficient. Price discrimination exists if it is able 1

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Econ 101 Microeconomic Theory Professor Jernej Copic to sell identical units of output at different prices. Ideally, if each consumer can be separately
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