AEM 331 Suggested Answers to Problem Set #4 1. a. Note that AC = 500/Q + 20 is always falling as Q increases. So there are
economies of scale for all levels of output. With a single-product natural monopolist, economies of scale are sufficient for su

AEM 331 Problem Set #4 Due 4/04/08 1. Gil Bates is a monopolist with the total cost function C(Q) = 500 + 20Q. There is a
market demand curve Q = 100 P. a. Over what range of output levels does Gils cost function display economies of scale? Over wha

AEM 331 Suggested Answers to Problem Set #4 1. a. Note that AC = 500/Q + 20 is always falling as Q increases. So there are
economies of scale for all levels of output. With a single-product natural monopolist, economies of scale are sufficient for subaddi

AEM 331 Problem Set #4 Due 4/03/09 1. Gil Bates is a monopolist with the total cost function C(Q) = 500 + 20Q. There is a
market demand curve Q = 100 P. a. Over what range of output levels does Gil's cost function display economies of scale? Over what ran

AEM 331 Practice Problems 1. Consider a market with demand: Q = 100 P. Let marginal costs be 20 if there is perfect competition. However, if there is a monopolist, assume it must pay an additional $10 per unit of output to reimburse lobbyists for th

AEM 331 Problem Set #5 Due 4/18/08 1. Assume a franchise is to be auctioned off where market demand is: Q 102 P . Suppose there are just two firms competing for this franchise. One firms cost function is C1 (Q) 100 Q while the other firms cost fu

AEM 331 Practice Problems 1. Consider a market with demand: Q = 100 P. Let marginal costs be 20 if there is perfect competition. However, if there is a monopolist, assume it must pay an additional $10 per unit of output to reimburse lobbyists for their ef

AEM 331 Problem Set #2 Due 2/13/09 1. A (mini-) refrigerator monopolist, because of strong scale economies, would charge a price of $120 and sell forty-five refrigerators in Iceland. Its average cost would be $60. On the other hand, the Iceland Planning C

AEM 331 Suggested Answers to Problem Set #2 1. a. From the two points on the demand curve that we're given, we know inverse demand is: P = 300 4*Q. Under competition, consumer surplus is (50*200)/2 = 5000. Under monopoly, consumer surplus is (45*180)/2 =

AEM 331 Problem Set #3 Due 2/27/09
P P2 P1 C1 C2 Z Y W U X V T Demand Post-merger Pre-merger
Q2
Q1
Q
1. Assume the following facts concerning the horizontal merger model developed by Williamson as discussed in class and shown above. Let inverse demand be

AEM 331 Suggested Answers to Problem Set #3 1. a. The deadweight loss pre-merger is zero (P = MC). Post-merger, deadweight loss is (using the graph): (70-44)*(56-30)/2 = 26*26/2 = 338. b. Pre-merger, PS = 0 and CS = 50*50/2 = 1250. Post-merger, PS = 26*30

AEM 331 Problem Set #5 Due 4/17/09 1. Assume a franchise is to be auctioned off where market demand is: Q = 102 - P . Suppose there are just two firms competing for this franchise. One firm's cost function is C1 (Q) = 100 + Q while the other firm's cost f

AEM 331 Suggested Answers to Problem Set #5 1. For both firms, solve for the lowest price where the average cost curve intersects demand. For firm 2, this is straightforward average cost always equals 12, so this is the lowest price they could bid. For fi

AEM 331 Problem Set #6 Due 5/1/09 1. Suppose Research R' Us (RRU) wants to merge with We Do Research (WDR). Both firms are research and development (R&D) intensive firms. The companies make the case that this merger should be allowed since there will be s

AEM 331 Suggested Answers to Problem Set #6 1. a. The innovation market. b. The government would argue that competition spurs innovation. The merger would hurt innovation by allowing for less competition in the innovation market. The second point would be

Final Practice Problems
1. Suppose there are two, independent demanders of electricity. The first group has inversed demand as follows: P = 120 - Q1 . The second group has inverse demand as follows: P2 = 100 - Q2 . 1
The cost of producing a unit of electr

AEM 331 Suggested Answers to Problem Set #1 1. a. The Harvard person would say that the market structure is established, and the monopolist would use her market power. Profit is: P*Q C(Q) = (74 3Q)*Q 2*Q = 74*Q 3*Q^2 2*Q. Setting the derivative equal to z

AEM 331 Practice Problems Answers 1. a. For the monopolist, MR = MC means that 100 2Q = 30 (marginal cost of production plus marginal cost of lobbying). Therefore, Q = 35 and P = 65. Under competition, P = MC, so 100 Q = 20, Q = 80, P = 20. b. Total surpl

AEM 331 Suggested Answers to Problem Set #6 1. a. The innovation market. b. The government would argue that competition spurs innovation. The merger would hurt innovation by allowing for less competition in the innovation market. The second point wou

AEM 331 Practice Problems Answers 1. a. For the monopolist, MR = MC means that 100 2Q = 30 (marginal cost of production plus marginal cost of lobbying). Therefore, Q = 35 and P = 65. Under competition, P = MC, so 100 Q = 20, Q = 80, P = 20. b. Tota

AEM 331 Problem Set #1 Due 2/1/08 1. (Contestability) Youve just been hired at the Department of Justice, and as your first assignment, you are to analyze an industry with one producer and the following characteristics: Cost: C(Q) = 2*Q Inverse deman

AEM 331 Suggested Answers to Problem Set #1 1. a. The Harvard person would say that the market structure is established, and the monopolist would use her market power. Profit is: P*Q C(Q) = (74 3Q)*Q 2*Q = 74*Q 3*Q^2 2*Q. Setting the derivative

AEM 331 Problem Set #2 Due 2/15/08 1. A (mini-) refrigerator monopolist, because of strong scale economies, would charge a price of $120 and sell forty-five refrigerators in Iceland. Its average cost would be $60. On the other hand, the Iceland Plann

AEM 331 Suggested Answers to Problem Set #2 1. a. From the two points on the demand curve that were given, we know inverse demand is: P = 300 4*Q. Under competition, consumer surplus is (50*200)/2 = 5000. Under monopoly, consumer surplus is (45*180)

AEM 331 Problem Set #3 Due 2/29/08
P P2 P1 C1 C2 Z Y W U X V T Demand Post-merger Pre-merger
Q2
Q1
Q
1. Assume the following facts concerning the horizontal merger model developed by Williamson as discussed in class and shown above. Let inverse

AEM 331 Suggested Answers to Problem Set #3 1. a. The deadweight loss pre-merger is zero (P = MC). Post-merger, deadweight loss is (using the graph): (70-44)*(56-30)/2 = 26*26/2 = 338. b. Pre-merger, PS = 0 and CS = 50*50/2 = 1250. Post-merger, PS =

AEM 331 Problem Set #6 Due 5/02/08 1. Suppose Research R Us (RRU) wants to merge with We Do Research (WDR). Both firms are research and development (R&D) intensive firms. The companies make the case that this merger should be allowed since there will

AEM 331 Suggested Answers to Problem Set #5 1. For both firms, solve for the lowest price where the average cost curve intersects demand. For firm 2, this is straightforward average cost always equals 12, so this is the lowest price they could bid. For fi

AEM 331 Problem Set #1 Due 1/30/09 1. (Contestability) You've just been hired at the Department of Justice, and as your first assignment, you are to analyze an industry with one producer and the following characteristics: Cost: C(Q) = 2*Q Inverse demand:

AEM 331 Suggested Answers to Problem Set #1 1. a. The Harvard person would say that the market structure is established, and the monopolist would use her market power. Profit is: P*Q C(Q) = (74 3Q)*Q 2*Q = 74*Q 3*Q^2 2*Q. Setting the derivative