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answerstohomework4summer2014.doc-Economics 101 Summer 2014 Answers to
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answerstohomework4summer2014.doc-Ec...
answerstohomework4summer2014.doc-Economics 101 Summer 2014 Answers to
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regulatory intervention that restricts the level of output from being the socially optimal amount of output
(if the monopoly was a single price monopolist the DWL would be even greater-look at the graph and see
if you can locate this area). We can calculate the DWL as follows: DWL = (1/2)(\$40 per unit - \$15 per
unit)(85,000 units – 60,000 units) = \$312,500.
5. Suppose a monopolist can be described by the following equations:
Monopolist’s demand curve: P = 250 – 5Q
MC for the monopolist: MC = 30
Assume that the monopolist has no fixed costs
a. Determine the profit maximizing level of output for this monopolist if it charges a single price.
Determine the profit maximizing quantity and the level of the monopolist’s profit. Show your work. Also,
enter your answers in the table below (you will be adding to this table throughout your work on this
problem).
Pricing Scheme
Price Charged
Quantity Produced
Profit
a) Single Price Monopolist
b) Monopolist charges two
prices
c) Monopolist practices
perfect price discrimination
b. Suppose this monopolist decides that it will charge 2 prices: \$140 for the first 22 units and \$100 for the
next 8 units. Determine the profit the monopolist will earn when it charges two prices and then enter your
answers into the above table. Show how you found your answers.
c. Suppose this monopolist decides to be a perfect price discriminator. What quantity of the good will the
monopolist choose to produce? Explain your answer. Then, calculate the value of the monopolist’s profit
if the monopolist is a perfect price discriminator. Show your work and then enter your answers in the
above table.
d. From your analysis in (a) through (c), what conclusion do you draw about price discrimination?
Explain your answer fully.
Answer:
a. To determine the profit maximizing quantity and price if this firm charges a single price for its product
we need to equate MR to MC and then use the determined quantity in the monopolist’s demand curve to
find the price the monopoly will charge. We are given the MC curve for the firm; we need to find the MR
curve for the firm. We can use the demand curve to find the MR curve for the firm: P = 250 – 5Q and
thus, MR = 250 – 10Q since the MR curve shares the y-intercept of the demand curve and has twice the
slope of the demand curve provided the demand curve is linear. Thus, 30 = 250 – 10Q or Q = 22. The
single price monopolist will produce 22 units. Use this quantity and the demand curve to find the price the
monopolist will charge: P = 250 – 5(22) = \$140 per unit.
To find the single price monopolist’s profit remember that profit = TR – TC. TR is easy to calculate: TR
= P * Q = (\$140 per unit)(22 units) = \$3080. TC is a bit more of a challenge: we do not have the TC curve
or the ATC curve, but we do have the MC curve and the assumption that FC are equal to zero. Since MC
is constant, that implies that the ATC of producing a unit of output is equal to the MC of producing an
additional unit of output (if the average height of the basketball team is six feet and all the additional
players we add to the team are six feet tall, then the average will not deviate from six feet). So, (\$30 per
unit)(22 units) = TC = \$660. Profit = \$3080 - \$660 = \$2420.
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