UMass Amherst ECON 103 - Problem Set 2

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1.)Monopoly and equilibriuma.)ServingsMarginal UtilityTotal RevenueMarginalRevenueMarginal Cost130303011.19227.955.825.812.19325.9577.8522.0512.99424.1396.5218.6714.39522.44112.215.6815.59620.87125.2213.0217.73719.41135.8710.6519.33818.05144.48.5321.53916.79151.116.7123.931015.61156.14.9926.53Beyonce will now sell 5 servings at \$22.44 because selling anymore would decrease herprofit, the marginal cost is greater than the marginal revenue at 6 servings.b.c.ServingsMarginalCostMarginalUtilityConsumerSurplus PerServingUnderPerfectCompetitionProducerSurplus PerServingUnderPerfectCompetitionConsumerSurplus PerServingUnderMonopolyProducerSurplus PerServingUnderMonopoly111.193010.598.227.5611.25212.1927.98.497.225.4610.25312.9925.956.546.423.519.45414.3924.134.725.021.698.05515.5922.443.033.8206.85617.7320.871.461.68719.3319.4100.08821.5318.05923.9316.791026.5315.61Total:34.8332.4618.2245.85Under perfect competition, the consumer surplus is \$34.83, found by calculating the sumof the difference between the marginal utility and the price for each serving up to the lastsold. The producer surplus is \$32.46, found by calculating the sum of the differencebetween price and marginal cost for each serving. The total social surplus is therefore\$67.29, found by adding the producer and consumer surpluses together. Under monopoly,the consumer surplus is \$18.22, found by calculating the sum of the difference betweenthe marginal utility and the price for each serving up to the last sold. The producersurplus is \$45.85, found by calculating the sum of the difference between price andmarginal cost for each serving. The total social surplus is therefore \$64.07, found byadding the producer and consumer surpluses together. Perfect competition is better forconsumers because they have a higher surplus than with a monopoly. This means thatthey get more value by paying less and getting more. Monopoly is better for producersbecause it gives a greater producer surplus than under perfect competition. This meansthat they get more value by achieving higher profits. Perfect competition is better forsociety because it has a greater social surplus than under monopoly. This means that thereis more excess value being created in total. Consumers save a lot more money whileproducers still make a decent profit.2.) Moving Equilibrium. Show the effect of each on the monopoly market equilibrium; youdon’t need to have exact answers but explain the direction of change in the demand and/ormarginal cost curves.a.)The demand curve for restaurants would be shifted outwards if individuals get anincrease in income. If they all want to spend it on restaurant eating, this will cause thedemand for restaurant dining to increase. The greater demand for restaurant dining willcause higher prices. This means that the supply curve will shift outwards and themarginal cost will remain unaffected.b.) If wages fall in Amherst, The marginal cost will decrease. Individuals will have toconsume less due to the lower wages, which inturn will cause the demand to fall. Thedecrease in demand will cause the supply curve to shift inwards. If less people are able toconsume goods, the production of goods will also decrease.c.)The price of beans will increase if there is a shortage of beans. Inturn, the marginalcost will increase and the supply curve will shift upwards. The demand curve will alsoshift inwards due to the increase in price.d.) If the cost of rent went upwards in Amherst, the demand curve would shift inwardsbecause individuals may not be able to afford the increase in rent. It would also pushpotential renters away causing the demand to go down. The marginal cost remainsunchanged.3.a. GWith information, network, and status effects assumed, the demand curve does notslope down, it slopes up. This means that there is not necessarily an equilibriumprice and quantity where demand equals marginal cost. If the demand curveslopes up, there might not be an equilibrium between supply and demand. Themarginal utility curve would have to have a smaller slope than the marginal costcurve.b. If Boeing sells the 787 Dreamliner at marginal cost, it will not recoup its initial\$50 billion investment because marginal cost does not take into account fixedcosts. This shows how a company that invests in fixed cost cannot survive sellingat marginal cost. This would mean our economy would be unproductive becausenew technology could never be developed.c.The supply curve slopes down when productivity increases with output because themarginal cost decreases with greater

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# UMass Amherst ECON 103 - Problem Set 2

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