Monopoly

1. At the profit-maximizing output a certain monopolist's price is exactly twice as high as marginal cost. What is the elasticity of demand?

2. Why do faculty get discounts from the university bookstore while students do not? Don't just say price discrimination. Why can price discrimination exist? Are all conditions necessary for price discrimination met? Discuss.

3. Prove that the demand curve facing a firm in an unregulated market must always be elastic in the range where a firm is selling if the firm is maximizing profits.

4. Assume that to acquire funds to clean up pollution caused by a local unregulated monopoly, a local government imposes a tax on the monopoly. The monopoly is currently earning positive profits. What would be the difference on the price and output of the firm between a tax per unit of output and a lump sum tax levied without regard to output? If you were the firm, which tax would you prefer? If you were an environmentalist, which tax would you prefer? Why?

5. A chandelier manufacturer has a marginal cost of $125 per unit when producing 4,000 to 5,000 units per month. Currently it sells 4,200 units at a price of $130 per unit, but it must cut unit price to $129 to sell 4,400. In order to maximize profits, should this firm raise, hold, or lower its price?