Name: ______________________________________________________________Welfare Effects of a MonopolyMonopolistic CompetitionHomework – Week 10Name: ______________________________________________________________Welfare Effects of a Monopoly1) Consider the graph below, and mark the following: monopoly quantity and price, consumer and producer surplus, and deadweight loss.MRMCDQP2) Many schemes for price discrimination involve some cost. For example, discount coupons take up the time and resources of both the buyer and the seller. This question considers the implications of costly price discrimination. To keep things simple, let’s assume that there are no fixed costs, and average total cost and marginal cost are constant and equal to each other. A) Draw the marginal cost, average total cost, demand, and marginal-revenue curves for the monopolist. B) In your diagram, mark the area equal to the monopolist’s profit and call it X. Mark the area equal to consumer surplus and call it Y. Mark the area equal to the deadweight loss and call it Z.C) Now suppose that the monopolist can perfectly price discriminate. What is the monopolist’s profit? (Give your answer in terms of X, Y, and Z).D) What is the change in the monopolist’s profit from price discrimination? What is the change in total surplus from price discrimination? Which one is larger? Explain. (Give your answer in terms of X, Y, and Z).E) Now suppose that there is some cost associated with price discrimination. To model this cost, let’s assume that the monopolist has to pay a fixed cost C to price discriminate. How would the monopolist make the decision whether to pay this fixed cost? (Give your answer in terms of X, Y,Z, and C).F) How would a benevolent social planner, who cares about total surplus, decide whether the monopolist should price discriminate? (Give your answer in terms of X, Y, Z, and C).G) Compare your answers to parts E and F. How does the monopolist’s incentive to price discriminate differ from the social planner’s? Is it possible that the monopolist will price discriminate even though doing so is not socially desirable?Monopolistic Competition1) Consider the market for jeans where there are many producers with different brands and styles that differentiate their productsA) What type of a market is this an example of? B) How do firms make decisions on their production quantity and prices in this type of market? What is the profit maximization rule? How do they decide which point maximizes profits?C) What are the characteristics of the long-term equilibrium in this type of market? Represent the long-term equilibrium in a graph and explain the process through which this equilibrium is reached (start from positive profits).D) What is the relationship between P, MC, and ATC in the long-term equilibrium in this
View Full Document