Lab 12_answers

a6 find the profit maximizing output and

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Unformatted text preview: . . . ∗. . . . . A6) Find the profit maximizing output and price. Solving the condition above for Q, we find . . billion. . . . , →→ . Substitute this back into the market demand curve to find . . ∗ . A7) What is the price elasticity of demand at the profit maximizing price? Is it in the inelastic or elastic portion of the demand curve? . . . , it is in the elastic range of the demand curve. A8) What is the consumer surplus, producer surplus and total welfare at the profit maximizing solution? Consumer surplus is the area under the demand curve above the price minus P(Q)Q: . . . . . . ∗ . | . = $ . . . billion cents, or $2.256 billion Alternative is to integrate as price varies from 27.86 to 43.42 along the demand equation (1), or . . . . . . | .. =(80.93)(43.42) – (0.932)(1885.3)-(80.93)(27.86) + (.932)(776.18) = 225.6 billion cents or $2.26 Producer surplus is the area above the supply curve below the price. In this case the supply curve = MC = 12.3, is constant, so producer surplus is (27.86-12.3)*29 = 451.24 billion cents, or $4.51 billion Total welfare = CS + PS = $2.26 + 4.51 = $6.77 billion. A9) What is the deadweight loss in this market? To find deadweight loss, we need to compare the monopoly solution to the solution under perfect competition. In a perfectly competitive market, P=MC, or P=12.3 cents. At this price, the quantity . . demanded would be . . . ∗, . Consumer surplus is the area under the demand curve above the price minus P(Q)Q: . . . . . | . .∗ . . . . . billion cents, or $9.02 billion. $ . Alternatively, one could have used the demand curve (1) to compute consumer surplus as in . . . . . . . . . | . . . . . . . = 902.4 billion cents or $9.02 billion. Producer surplus = 0 Total Welfare = $9.02 billion for the perfectly competitive market So, DWL is the difference: $9.02 – $6.77 = $2.25 billion. A10) Postal rates are...
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This document was uploaded on 03/08/2014 for the course ECON 301 at Iowa State.

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