1. A monopolist faces a demand curve Q=300- 2P and has the total cost curve
C(Q) = 30Q+3000. What is the profit maximizing price and quantity? What is the optimized
profit? Graph the demand and the monopoly’s marginal cost function. Identify and calculate the
deadweight loss.
2. A monopoly faces demand elasticity of -2 and marginal cost of $4, what is the optimal monopoly
price? (Calculate using the monopoly pricing formula)
3. Amy Bob and Carry has the following reservation prices for Chips and Grapefruits
Chips
Grapefruits
Amy
10
8
Bob
7
10
Carry
4
12
What are the optimal prices for Chips and Grapefruits when they are sold separately? What is the profit?
What is the optimal price for a Chip and Grapefruits bundle? What is the profit when the two are
bundled?
4. A vendor is deciding whether to sell his product in a farmers market. The vendor faces demand of
Q=200-4P and total cost of C(Q)=20Q. If the vendor must pay $1000 to put up a store in the
farmer’s market, should he take part in the farmers market?
5. What are the differences between monopolistic competition and perfect competition in terms of
the nature of the product, barriers to entry, profits and market power? Name 2 examples of
monopolistically competitive industries?
Monopolistic Competition
Monopoly
Product
Barrier
Profit
Market Power
6. A museum charges $3 per Children entry and $5 per Adult entry. If the price elasticity of demand
for Adults is -1.25 what must be the price elasticity of demand for Children. Assuming that the
museum is charging the optimal prices?
7. Name three reasons for existence of monopoly in markets. Explain how the monopoly is maintained in
each case.
8. What are the positive and negative consequences of monopolistically competitive industries? Explain.
Problems: 10 points each.
9. Compare the Long Run Equilibria of a Perfectly Competitive industry and a Monopoly,
a) Illustrate each case in separate diagrams. Include demand, ATC, MC curves. (4)
b) Mark the prices, quantities and shade the profit in the respective diagrams. (3)
b) Compare allocative efficiency, productive efficiency and firm profits. (3)
10. Adult demand for an upcoming movie is QA = 100-2P and student demand is QS =100-3P. Total
Demand is therefore Q = QA+QS= 200-5P. Marginal cost is $10 per person.
a. What is the optimal price and profit when the movie theater charges a single price for
everyone.(4)
b. What are the optimal prices and profit when the movie theater charges one price for adults and a
different price for students? (6)
11. Cafeteria Beta is a monopoly for lunches served at a school. It faces a demand of Q=200-P. Marginal
Cost is $20 per meal. Calculate the profit maximizing quantity, price, profit and deadweight loss for each
of the following cases.
a. If Cafeteria Beta can perfectly price discriminate. (3)
b. If Cafeteria Beta can set one monopoly price. (3).
c. If Cafeteria Beta uses a two part tariff. (4)