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Problem Set 9 (75 points) 1. A student argues, "If a monopolist finds a way of producing a good at lower cost, he will not lower his price. Because he is a monopolist, he will keep the price and the quantity the same and just increase his profit." Do you agree? Use a graph to illustrate your answer. The argument is incorrect. As the graph shows, a reduction in marginal cost will cause a monopolist to reduce his price. 2. Economist Harvey Leibenstein argued that the loss of economic efficiency in industries that are not perfectly competitive has been understated. He argued that when competition is weak, firms are under less pressure to adopt the best techniques or to hold down their costs. He referred to this effect as "x-inefficiency."…show more content…
Gardner using economic theory to justify your answer. Economic theory suggests that price should be equal to MC to achieve allocative efficiency. P = 28 - 0.0008Q MC = 0.0012Q 28 - 0.0008Q = 0.0012Q 28 = 0.002Q Q = 14,000 P = 28 - 0.0008(14,000) P = 28 - 11.20 P = 16.80 c. Compare the economic efficiency implications of (a) and (b) above. Your answer need not include numerical calculations, but should include relevant diagrams to demonstrate deadweight loss. In (a), the price is higher ($20 as opposed to $16.80), and quantity lower (10,000 as opposed to 14,000). The monopolistʹs higher price and smaller quantity result in a deadweight loss as shown below. 5. A pure monopsony buyer of a resource has a marginal value curve for the resource expressed as: MV = 100 - 0.4Q. Its marginal and average expenditure functions are: ME = 20 + 0.023Q AE = S = 20 + 0.011Q. a. What is the price and quantity that would prevail in a competitive market? The QC is computed as follows: Equate S to MV. 20 + 0.011Q = 100 - 0.4Q 0.411Q = 80 QC = 194.65 PC = 20 + 0.011(194.65) = 22.14 b. What quantity is purchased by a monopsonist, and at what price? The QM is computed as follows: Equate ME to MV. 20 + 0.023Q = 100 - 0.4Q 0.423Q = 80 QM = 189.13 PM = 20 + 0.011(189.13) = 22.08 c. Compute the deadweight loss that results when the firm acts to maximize profit (that is, takes advantage of its monopsony power). Compute the height of MV between HM and HC. HM = 100 -

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