Problem Set 9

Question 1: Which of the following statements about monopoly is true?

A. A single price monopolist maximizes its profits by setting marginal revenue = marginal cost where the marginal cost curve crosses marginal revenue curve from above.

B. The monopolist must have positive profits both in the short and long run.

C. A perfect price discriminating monopolist does not maximize the total surplus which is given by the consumer surplus plus the producer surplus.

D. Although a monopolist is able to set its output level, it is not able to set its own price.

E. A monopolist will react to an increase in demand by producing more output, charging a higher price, and earning a larger profit.

Question 2: Which of the following statements about natural monopoly is true?

A. The long run average total cost curve is upward sloping, when it intersects the demand curve.

B. The total surplus is maximized, when the firm produces at that quantity level where the marginal revenue is equal to the marginal cost.

C. The total surplus is maximized, when the firm produces at that quantity level where the firm breaks even.

D. The total surplus is maximized, when the firm produces at that quantity level where the marginal cost curve intersects the demand curve.

E. When marginal cost pricing is implemented, the firm earns a positive economic profit.

Question 3: Which of the following statements about monopolistic competition is true?

A. Because it produces a differentiated product, a monopolistic competitor faces a horizontal demand curve.

B. Even in the long run, a monopolistically competitive firm can have positive profits.

C. In the long run, a monopolistic competitor will operate with excess capacity.

D. A monopolistically competitive firm will never advertise its product.

E. In order to maximize profits, a monopolistically competitive firm does not necessarily choose the quantity level where marginal revenue is equal to marginal cost.

Question 4:

Consider the following game. The matrix gives the payoffs for (Player 1, Player 2) in each cell. Assume both players know the information in the table below.

a) What is the each player's dominant strategy?

b) What outcome will you predict? In doing so, what assumption did you put?

Question 5: Suppose the demand curve for a good is Q = 100 - P. A firm producing this good has a total cost function given by TC = 800 + 10Q, so its marginal cost is 10, the slope of the total cost curve. Suppose this firm is a single price monopolist of this market.

Find the equilibrium output, the equilibrium price, its profit, the consumer surplus, the producer surplus, and the dead weight loss in the short run.