1. a) Draw demand, marginal-revenue, average-total-cost, and marginal-cost curves for a monopolist. Demonstrate profit-maximizing price and amount of profit.

b) On this graph, demonstrate the deadweight loss.

2. A publisher faces the following demand schedule for next novel from one of its popular authors:

Price    Quantity demanded
$100       0 novels
90           100,000
80           200,000
70           300,000
60           400,000
50           500,000
40           600,000
30           700,000
20           800,000
10           900,000
0           1,000,000

The author is paid $2 million to prepare the book, and the marginal cost of publishing the book is a constant $10 per book.

b. Compute marginal revenue. How does marginal revenue compare to price? Describe.

c. Graph the marginal-revenue, marginal-cost and demand curves. At what quantity do the marginal-revenue and marginal-cost curves cross? What does this signify?

d. In your graph, shade in the deadweight loss. Describe in words what this means.

e. If the author were paid $3 million instead of $2 million for the book, how will this affect the publisher’s decision regarding what price to charge? Describe.

f. Assume that the publisher was not profit-maximizing but was concerned with maximizing economic efficiency. What price will it charge for the book? How much profit will it make at this price?

3.a) Give two exs of price discrimination. Identify what type of price discrimination each ex is (i.e. perfect, 2nd degree or 3rd degree).

b) Name and describe the three conditions that must hold in order for a firm to be able to price discriminate.

4.

Larry and Moe run the only saloon in town. Larry wants to sell as many drinks as possible without losing money. Moe wants to make the largest possible profits. Using the graph below (you can re-draw it on your own paper or print this out), show the price and quantity of favored by each person.

Extra credit: Curly wants to maximize revenue. Show his favored price and quantity.

5. Based on market research, a film production company in Ectenia obtains the following information about the demand and production costs of its new DVD:

Price    Quantity    Total cost
1000       0           1000
950        5            1125
900       10           1500
850       15           2250
800       20           3500
750       25           5250
700       30           7500
650       35         10250
600       40         13500
550       45         17250
500       50         21500

a. Determine the price and quantity which maximizes the company’s profit.

b. Compute and graph demand, marginal revenue and marginal cost.

c. Illustrate the price and quantity that would maximize social welfare and the deadweight loss.