ECON 2 Problem Set 2 – Evaluate the validity

Subject: Economics / Macroeconomics
Question
ECON 2
Problem Set 2

Part I. Evaluate the validity of each of the following statements.
a) Because the presence of a monopoly causes the economic “pie” to get smaller, we should
not expect to see them exist in practice.
b) If a monopolist can perfectly price discriminate, then society should allow the monopolist
to do so since there will be efficiency implications.
c) In the long run, a monopolist will produce a level of output where the price, marginal
revenue, average revenue, marginal cost, and average total cost are all equal.

Part II. Problems/Analysis
1) Consider a market with demand curve given by P 90 Q . The total cost of production for
1
one firm is given by TC (q) q 2 10 . The marginal cost of production is MC q .
2
a) (5 points) Find expressions for the average variable, average fixed, and average total
costs.
b) (5 points) If the market is perfectly competitive, find the supply curve for one firm.
Explain.
c) (5 points) If the market price was $10, how many perfectly competitive firms are in
the industry if they are identical? Explain.
d) Find an expression for the monopolists marginal revenue curve (hint: recall the
relationship between the MR curve’s and the demand curve’s slopes.)
e) (5 points) If the market is monopolized by one firm, how many units will be sold and
at what price? Explain.

2) Consider a market with demand curve given by P 100 2Q . The total cost of production
for one firm is given by TC ( q) 5q . The marginal cost of production is MC 5 per unit.
a) Show that the average total and average variable costs are equal to the marginal cost
per unit and that this doesn’t change. Explain.
b) If the market is characterized by perfect competition, how many units will be sold?
At what price will they be sold?
c) Calculate the consumer and producer surplus in the short run equilibrium.
d) If the industry is instead monopolized by one firm, what price and quantity will be
charged and produced by the monopolist to maximize profits?
e) Calculate consumer surplus, producer surplus (profit here), and the deadweight loss
from monopolization. Make sure the entire “pie” is accounted for from part c).
f) If the monopolist can perfectly price discriminate, how many units will be sold? At
what price will the last unit be sold?
g) What are the equity/efficiency implications of f) in comparison to c) and e)?

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