Practice Questions Monopoly_2011

Practice Questions Monopoly_2011 - Microeconomics II...

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Microeconomics II Chapter 11, Monopoly Assessed Questions (in class) from the textbook: 34. The price/marginal cost ratio is 5000/2000 = 2.5. The Lerner Index is (5000 -  2000)/5000 = 0.6. Hence Segway believes it faces a demand elasticity of -1.67. 38. In the competitive case, equilibrium is found by equating supply and demand  curves,  =  S : 1.787 0.0004641 0.496 0.00020165 Q Q - = - + Then  * * 3429.2151 lb 0.19550 $/lb C C Q P = = Once the specific tax  $0.01 τ =  is imposed, the supply curve, which is also  MC , shifts up  (see Figure 11.17a). To find the after-tax equilibrium, we solve 1.787 0.0004641 0.496 0.00020165 0.01 3414.1945 lb 0.20247 $/lb C C D S S Q Q Q P = = + - = - + + = = This suggests that tax incidence in the case of competition is * 0.20247 0.19550 0.7 70% 0.01 C C P P p - - = = ; In the monopoly case, pretax profit-maximizing output and price levels are found by  equating  MC  and  MR  (see Figure 11.17b). Marginal revenue is ( ( ) ) ((1.787 0.0004641 ) ) 1.787 0.0009282 dR d d MR P Q Q Q Q dQ dQ dQ Q = = = - = - Marginal cost is the same as in the competitive case. Then,  MR  =  MC  means that
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* * 1.787 0.0009282 0.496 0.00020165 2020.71 lb 1.787 0.0004641 2020.71 0.8492 $/lb M M Q Q Q P - = - + = - ; ; After specific tax  τ is imposed,  MC  shifts to  MC  and monopoly chooses output that  satisfies the following condition
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MR MC MC τ = = + Then 1.787 0.0009282 0.496 0.00020165 0.01 2011.7714 lb 1.787 0.0004641 2011.7714 0.8533 $/lb M M Q Q Q Q - = - + + = = - ; Tax incidence on consumers in the case of monopoly is * 0.8533 0.8492 0.41 41% 0.01 M M P P p - - = = = Figure 11.17 Other Practice Questions with Solutions: 1. The following table shows the demand curve facing a monopolist who produces at a  constant marginal cost of $10: Price Quantity 27 0
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24 2 21 4 18 6 15 8 12 10 9 12 6 14 3 16 0 18 a. Write an equation for the firm’s marginal revenue curve.  (Hint: It may help  to write the equation for the demand curve first.) ΔP/ΔQ = -3/2 = Slope of demand curve or AR P   = a – 1.5Q, At Q = 0, P = 27 Therefore, a = 27  P = 27 – 1.5Q TR = 27Q – 1.5Q 2 MR = 27 – 3Q b. What are the firm’s profit maximizing output and price?  What is its profit?
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This note was uploaded on 02/13/2012 for the course ECON 121 taught by Professor Adam during the Spring '11 term at Bunker Hill.

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Practice Questions Monopoly_2011 - Microeconomics II...

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