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E202Exam3.7

# E202Exam3.7 - Marginal revenue is MR = 30 2 Q The...

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d. What price should the airline charge during the summer and for the rest of the year to maximize profits? How many tickets will be sold? Answer : The airline should pick quantity to set marginal revenue equal to marginal cost in each market and then set price for that quantity based on the demand curve for each market: 2600 - 10 Q = 200 yields Q = 240 tickets, so P = 2600 - 5 Q = 2600 - 1200 = \$1,400 during the summer, and 2000 - 10 Q = 200 yields Q = 180 tickets, so P = 2000 - 5 Q = 2000 - 900 = \$1,100 for the rest of the year. 3. (20 pts) Suppose a monopolist faces a demand curve given by P = 30 - Q, with marginal cost curve MC = Q. a. Derive equilibrium price and quantity. Answer
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Unformatted text preview: : Marginal revenue is MR = 30 - 2 Q. The equilibrium quantity is found by setting MR = MC so 30 - 2 Q = Q gives Q = 10. The equilibrium price is P = 30 - Q = 30 - 10 = \$20. b. Derive and graph producer surplus, consumer surplus, and total economic surplus. Answer : Producer surplus is (\$20 - 10) 10 + (\$20 - 0) (10)/2 = \$150. Consumer surplus is (\$30 -20) 10/2 = \$50. Total economic surplus is 150 + 50 = \$200. c. Derive and graph the deadweight loss due to monopoly Answer : The deadweight loss is the triangular area (20 - 10) (15 - 10)/2 = \$25, which is the difference between fully efficiency and total economic surplus with the monopoly (\$30 - 0) 15/2- 200 = \$25....
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