Introductory Economics
Eco 108
HW 6

1. How does the profit maximizing price and quantity for a monopoly differ from those in a perfectly competitive industry in the long run? If a monopoly has positive profits in the short run, what happens in the long run? Why?

2. Suppose that we have a demand curve given by, P = 10-2Q, marginal revenue given by, MR = 10-4Q, and marginal and average cost given by, MC = AC = 2.

   • [a.] What is the profit maximizing quantity for a monopolist? What is the corresponding price? What are the monopolist's profits? What is the consumer surplus under monopoly? What is the dead weight loss under monopoly?

   • [b.] What is the efficient quantity to produce? What is the consumer surplus given this quantity? What is the dead weight loss?
   • [c.] Suppose that this monopolist can perfectly price discriminate. What are the monopolist's profits now? What is the resulting consumer surplus? What is the dead weight loss?

   • [d.] What cost might a monopolist face in order to price discriminate? Name at least one. How much would the monopolist in this example be willing to pay in order to perfectly price discriminate?

3. Draw two figures. In the first draw a demand curve, a MR curve, an AC curve, and a MC curve for a monopolist that is making positive profits in the short run. In the second do the same for a monopolist that is making negative profits in the short run. In both figures graphically show the profit or the loss. What happens to each of these monopolists in the long run?

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