Problem 2 Consider a monopolistic firm deciding how many units of a new product to sell on the market. The firm’s cost function is given by C(q) = 2q2. The inverse demand of this product is given by p = 120 − 2q, where q is the quantity and p is the price. What would the consumer surplus and producer profit be if the firm was a price taker? Calculate the corresponding quantities and show them on a graph. Assume the firm cannot price discriminate among its Find the monopoly quantity, price, and profit. Calculate the deadweight Calculate the elasticity of demand at the optimal (profit maximizing) level of production. Is the monopolistic firm operating on elastic or inelastic part of the demand?

BYOB is a monopolist in beer production and distribution in the imaginary economy of Hopsville. Suppose that BYOB cannot price discriminate; that is, it sells its beer at the same price per can to all customers. The following graph shows the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) for beer in this market. Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for BYOB. If BYOB is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if BYOB is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss. PRICE (Dollars per can) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 MC 0 0.5 1.5 ATC MR D 1.0 2.0 2.5 3.0 QUANTITY (Thousands of cans of beer) 3.5 4.0 Monopoly Outcome Profit Loss

Consider a market for cars with just one firm. The firm has a linear cost functionC(q) = 2q. The market inverse demand function is P(Q) = 9 − Q, where Q is thetotal quantity produced. Since initially there is just one firm, q = Q.(a) Set up the maximisation problem for the monopolist and determine the optimalprice and quantity of cars produced. How much profit does the firm make?

Lagatt Green is a monopoly beer producer and distributor operating in the hypothetical economy of Lightington. Assume that Lagatt Green is not able price discriminate, and so it sells its beer to all customers at the same price per bottle. The following graph gives the marginal cost (MC), marginal revenue (MR), average total cost (ATC), and demand (D) curves that Lagatt Green faces for beer in Lightington. Place the black point (plus symbol) on the graph to indicate the profit-maximizing price and quantity for Lagatt Green. If Lagatt Green is making a profit, use the green rectangle (triangle symbols) to shade in the area representing its profit. On the other hand, if Lagatt Green is suffering a loss, use the purple rectangle (diamond symbols) to shade in the area representing its loss. PRICE (Dollars per bottle) 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 D MC D 15 20 25 30 3.5 QUANTITY (Thousands of bottles of beer) 45 ATC MR Price (Dollars per bottle) 2.00 2.25 40 Monopoly Outcome…

Assume that one of the hot dog vendors successfully lobbies the city council to obtain the exclusive right to sell hot dogs within the city limits. This firm buys up all the rest of the hot dog vendors in the city and operates as a monopoly. Assume that this change doesn't affect demand and that the new monopoly's marginal cost curve corresponds exactly to the supply curve on the previous graph. Under this assumption, the following graph shows the demand (D), marginal revenue (MR), and marginal cost (MC) curves for the monopoly firm. Place the black point (plus symbol) on the following graph to indicate the profit-maximizing price and quantity of a monopolist. PRICE (Dollars per hot dog) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 0 45 Monopoly MC MR 90 135 180 225 270 315 QUANTITY (Hot dogs) D 360 405 450 Monopoly Outcome Deadweight Loss ?

In a monopolistically competitive industry, a firm has a short-run and long-run cost function C = 150 + 20Q + 5Q2  The demand function for the firm's product is Q = α – P. (C = cost, Q = quantity, P = price, α = parameter). (i) If α = 116 short, determine the quantity, the price and profit of the business. (ii) What is the firm's demand function at long term equilibrium? MAKE A GRAPH

Using a graph, explain why a firm might not want to spend A on advertising, even though it shifts the firm's demand curve to the right. In the figure to the right, let D¹ and MR¹ be demand and marginal revenue before advertising. Assume the monopoly has a constant marginal cost with no fixed cost such that MR¹ = AC¹. Then, suppose the monopoly advertises and that the advertising shifts demand and marginal revenue to D² and MR². Assume advertising is a marginal cost, such that the new marginal cost after advertising is still a constant and still equals a new average cost. Using the line drawing tool, graph the marginal cost curve, reflecting the cost of the advertising, such that the monopoly breaks even from advertising. Label this curve 'MC².! Carefully follow the instructions above, and only draw the required objects. p, $ per unit 30- 28- 26- 24- 22- 20- 18- 16- 14- 12- 10- 8+ 6- 4- 2+ 0- 0 2 V MC = A ▬▬▬▬▬ AMR MR² D 4 6 8 10 12 14 16 18 20 22 24 26 28 Q, Quantity D²

Price (dollars per unit) 600 400 AC = MC De mand Marginal revenue 200 400 Computers (units per day) The graph above shows the average cost, marginal cost, demand, and marginal revenue curves for selling computers in a given market. The computer industry is currently perfectly competitive and in equilibrium. Suppose all firms in the industry are taken over by a single firm that establishes a monopoly in the market. Assuming the monopoly maximizes profit, Select one: there will be no effect on the price of computers. Ob. the price of computers will increase from $400 to $600, but there will be no change in quantity demanded. Oc. the price of computers will be set equal to the marginal cost of computers. O d the price of computers will increase from $400 to $600, and the quantity demanded will fall from 400 to 200 per day.