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Questions 2. Assume a monopolist faces a market demand curve P = 100 – 2Q, and has the short-run total cost function C = 640 + 20Q. What is the profit-maximizing level of output? What are profits? Graph the marginal revenue, marginal cost, and demand curves, and show the area that represents deadweight loss on the graph. 3. In question 2, what would price and output be if the firm priced at socially efficient (competitive) levels? What is the magnitude of the deadweight loss caused by monopoly pricing? 4. Show that if a firm is a natural monopoly, a government policy that forces marginal cost pricing will result in losses for the firm. 5. Suppose a change in technology available to fringe firms increases their elasticity of supply, …show more content…

Profits fall by $143.75 (from $900 to $756.25). Tax revenue collected is $137.50 ($5 × 27.5 = $137.50). See Figure 11.4. Figure 11.4 7. In order for the legislation to have a net positive effect, any social cost must be more than offset by the lower prices when the patent expires. Firms would engage in less research and development. If a firm believed that a project could only become profitable in the 11th through 17th year of the patent, it would not be funded, or may be funded at a less than efficient level. The reduction in health that occurs as a result represents the social cost of the policy. 8. The buyer would have to purchase whatever the source is of the monopolist’s barrier to entry, for example, a patent, or the control of a resource needed for production. The value of a barrier to entry is the discounted stream of profits that a monopolist could expect to earn from that monopoly. In the case of a patent it would be the discounted stream of profits that could be earned in the remaining years before the patent expires. 9. See Figure 11.5. When marginal cost is zero, the firm sells 25 units of output for $25 per unit. The welfare loss is equal to the area of triangle abc, or $312.50. When marginal cost increases to $10, the firm reduces output to 20, and the new welfare loss is def, or $250.00. Figure 11.5 10. No. If the incumbent firm is a natural monopoly, to encourage entry through any form of

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