Economics 201 Microeconomics
Tutorial 7
Question 1:
"In the long run equilibrium of a monopolistically competitive industry profits are driven to zero but the outcome is not "efficient" as opposed to the long run equilibrium of a perfectly competitive market." Briefly explain what this means. Your answer should be accompanied by TWO NEATLY LABELLED diagrams, one each for the long run equilibrium in the two markets.
Question 2:
A monopolist has the cost function TC = 10Q and faces a demand curve of the form. P = 70 − 2Q.
(i) Calculate the monopolist’s profit-maximising price-quantity combination and profits. (ii) What is the magnitude of the consumer surplus and how much profit does the monopolist make? (iii) Suppose this industry opens up to competition, with free entry and exit, and all firms having access to the same technology as the current monopolist. Calculate the long-run equilibrium output level produced by the industry. (iv) Show that this exceeds the sum of monopolist’s profits and the consumer surplus in (ii). (v) What is the value of the deadweight loss? Depict the profit maximizing outcome, consumer surplus, profit and deadweight loss in a neatly labelled diagram.
Question 3:
Assume that a monopolist sells a product with a total cost function of: TC = 1200 + 0.5Q2
The market demand curve is given by P = 300 – Q. Find the profit-maximising output and price for this monopolist. Is the monopolist profitable?
Question 4:
Consider a monopolist facing a demand curve P = 200 – Q. (i) Suppose the monopolist argues that the profit maximizing price and quantity are given by P = $100 and Q = 100. What can you conclude about the monopolist’s cost structure? (ii) What is the price elasticity of demand at this price-quantity configuration? (iii) Now, alternatively, suppose the monopolist has linear cost of the form. TC = 20Q implying AC = MC = $20. What is the profit maximizing price and quantity? (iv) What is the price elasticity of demand at this profit-maximizing price-quantity configuration?