# Economics 105 Problem Set 3– Spring Quarter 2014

Directions: Answer all questions. You must show your work (where applicable) to get full credit.1) Monopoly Example #1a) Draw a short run supply and demand curve. Label the competitive equilibrium and the monopolistic equilibrium. Hint: you will need to draw an additional curve to label the monopolistic equilibrium. An approximation of this curve is fine.b) In the monopolist equilibrium, what is the relationship between price (P) and marginal cost (MC)?c) Label the deadweight loss created by the monopolist in your diagram above.2) Monopoly Example #2a) Given the following demand schedule, derive the marginal revenue curve for a potential monopolist.Q01,0002,0003,0004,0005,0006,0007,0008,0009,00010,000P\$100\$90\$80\$70\$60\$50\$40\$30\$20\$10\$0Total Rev.Marginal Rev.–b) Suppose the long-run marginal cost curve (and thus ATC curve) for the monopolist was \$30 per unit at all quantity levels. What is the optimal level of output for the monopolist and what price will it charge?c) What is the monopolist’s profit at this level of output?d) If this were actually a competitive market (with the same long-run costs curves) what would be the equilibrium quantity and price in the competitive scenario.e) Calculate the value of the consumer surplus, producer surplus, and deadweight loss under both the monopolistic equilibrium and the competitive equilbrium.3) Monopoly Example #3a) Suppose there is a “natural monoply,” i.e. production exhibited increasing returns to scale and marginal cost is constant but essentially zero.i) Draw the ATC and MC curves for such a firm.ii) Explain why no firm would enter this market if they expected it to be a competitive market.iii) Why is it efficiency enhancing for the government to allow a single firm to be the monopolist in this market — even if there is a DWL associated with the monopolist.4) Price Controls — Read the article “Venezuela Price Controls Add to Economic Turmoil,” printed in the Chicago Tribune last November and answer the following questions. a) What is the name of the type of price control that President Canizares implemented in Venezuela for refrigerators, washers, TVs, and stoves?b) Draw a picture (using supply and demand curves) of how such a price control would affect the equilibrium in one of these markets, e.g. TVs.c) Why is it not totally surprising that “fights broke out as customers tried to force their way to the head of the line?”d) The article mentions that previous price controls have hurt the agricultural sector. How can price controls of this sort hurt business (and also the overall economy)?5) TaxesX048121620Px\$12\$10\$8\$6\$4\$2MC\$0\$2\$4\$6\$8\$10a) Given the supply and demand curves described in the schedule above, what is the competitive equilibrium in this market?b) Suppose that the government imposes a \$4 tax on firms. Write down the implied supply schedule on the above chart and tell me the new equilibrium.c) Who pays for the tax, i.e. how much of the \$4 tax is paid for by consumers and how much is paid for by firms?d) What is the value of the tax revenue? What is the value of the DWL created by this tax?