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Unformatted text preview: 1. Suppose that Barilla has a monopoly on store bought pasta. It faces a straight line demand curve with a vertical intercept of $100 and a horizontal intercept of 1,000,000 units. The constant marginal cost is $25. Barillas profit is Answer: Slope = - 100/1,000,000 = - .0001 P= 100 - .0001Q Q = -10,000P + 1,000,000 = (P-MC)Q = (P-25) (-10,000P+1,000,000) = -10,000P 2 + 250,000P + 1,000,000P 25,000,000 = -20,000P + 1,250,000 Set = 0 and solve for P 0 = -20,000P + 1,250,000 20,000P = 1,250,000 P = $62.50 To figure out profit plug P into your original profit equation = (62.50-25)(-10,000(62.50) + 1,000,000) = (37.50)(375,000) = $14,062,500 2. Suppose Audi has a monopoly on the automobile industry. It faces a straight line demand curve with a vertical intercept of $80,000 and a horizontal intercept of 200,000 units. The constant marginal cost is $20,000. The deadweight loss from monopoly is Answer: Slope = - 80,000/200,000 = - 0.4 P = 80,000 - .4Q Q = 200,000 2.5P = (P-MC)Q = (P-20,000)(200,000-2.5P) = (P-20,000)(200,000-2....
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- Fall '10