ECON 300 Homework 7 **This homework is for your own benefit and it not turned in**

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1 ECON300Homework7 **Thishomeworkisforyourownbenefitanditnotturnedin** Chapter11questions:3,9,10,14,16,20,25,26,30,41 Chapter12questions:3,7,13,16,18,39 Chapter13questions:1,3,21,26(partaonly) Answers Chapter11questions: 3. When demand is D 1, the price the monopoly sets (vertically above the point of intersection of MR 1 and MC on D 1 ) is above the AC and thus the monopoly makes a positive profit. However when the demand curve shifts to the left, to D 2, the demand is below the AC curve and there is no price where the monopoly can make a positive profit. 9. The values of price and quantity depend on the demand curve drawn by the student. Profits are Area abcd and the deadweight loss is Area bef.

2 10. The effect of a franchise tax or lump-sum tax on a monopoly is to reduce profits by the amount of the tax. Because there is no change in marginal cost, the profit-maximizing/lossminimizing output and price remain unchanged, with one exception. If the tax is large enough, losses may exceed fixed costs. If that is the case, the firm will shut down (produce no output) in order to minimize losses. 14. No. In order for a firm to be a natural monopoly, it must be the case that the average cost curve is cut by the demand curve in its downward-sloping region. If the demand curve crosses the average cost curve in the upward-sloping region, it is possible that another firm could profitably produce in the same industry. 16. If the government sets a price cap between the monopoly price and the socially optimal price, output increases from Q M to Q R, and deadweight loss is reduced from Area abc to cdf. 20. See Figure After the removal of the tariff, the former monopoly will sell its products at the world price p w. The new quantity Q w is determined by the intersection of its MC curve and the world price. The consumer benefits from the removal of the tariff and the former monopoly suffers losses.

3 25. We know MR = 100 2Q and MC = 5. Set MC = MR and solve: 5 = 100 2Q Q * = 47.5 p * = 52.5 profit = = $2, If the cost function changes to C = Q, the quantity and price will not change, however the profit will be = $2, We know MR = 5Q 1/2 and MC = 5. Set MC = MR and solve. We get Q * = 1, p * = 10 and profit = 10 5 = $ The price/marginal cost ratio is 99/45.37 = Using the formula for the Lerner Index, the elasticity ε a. If the consumer cannot steal music, the total demand function will be p = 120 Q/2. The monopoly will set MR = 120 Q = 20, such that Q = 100 and p = 70. Consumer surplus will be 2500, producer surplus will be 5000, and deadweight loss will be b. If the dishonest customer can steal music, then the total demand function will be p = 120 Q. The monopoly will set MR = 120 2Q = 20, such that Q = 50 and p = 70. c. When dishonest customers can pirate the music, consumer surplus will be 1250, producer surplus will be 2500, and deadweight loss will be Chapter 12 answers 3. The pharmaceutical firms offer the discount to low-income seniors because the seniors would probably not purchase the medicines if they were not discounted. By segregating this portion of the market, they are able to price discriminate profitably because the marginal cost of producing the extra medications is very low. Thus, if they can still charge higher prices to the rest of the market, they will profit from the discounted prescriptions as well. (In addition to the short-run profits, the pharmaceutical firms get good publicity, which could forestall more costly regulation in the future.) 7. Lower profit margin indicates the PC market is becoming more competitive. In other words, the market power of PC producers is decreasing, therefore lowering their ability to price discriminate. 13. The monopolist produces where price equals marginal cost. Total revenue is the area under the demand curve from the origin to Q *, or OafQ *. Total cost is 0dbQ *. Profits are adg gbf.

4 16. Yes. Even if a consumer purchased 40 units per day, the average price would just equal the monopoly price, but the consumer surplus would fall from $450 to $400. In addition, the consumer in Panel (b) pays $60 for 30 units, but the consumer in Panel (a) must purchase 40 units to achieve the same average price. If they only bought 30 units, their average price would be $ Output expands, as do profit and consumer surplus. When the markets are combined, the monopolist sells for $5, all to customers in market 2. When the markets can be separated, price and quantity remain unchanged in market 2, but the monopolist also sells for p 1.

5 39. Set marginal revenue in each market equal to marginal cost to determine the quantities. Plug the quantities into the demand functions to determine prices. MR 1 = 100 2Q 1 = 30 = MC MR 2 = 120 4Q 2 = 30 = MC Q 1 = 35; p 1 = 65 Q 2 = 22.5; p 2 = 75 Chapter 13 answers 1. See Figure 13.1 in the text. Each cartel member has an incentive to cheat, reasoning that if one country increases the output this will not change the price much. At the same time, since the marginal revenue is above marginal cost, by producing more oil than the agreed-upon amount, the country can make additional profit. 3. In the graph, the residual demand curve for Southwest lies above that for U.S. Air due to Southwest s cost advantage. Each airline sets its marginal cost equal to marginal revenue based on its residual demand curve. Southwest produces Q 2, and U.S. Air produces Q 1. This result is shown algebraically in Appendix 13A. 21. See answer in back of the book 26. See answer in back of the book