Microeconomics Answers

1. Can a firm be a natural monopoly if it has a U-shaped average cost curve? Why or why not?

2. Can a firm operating in the upward-sloping portion of its average cost curve be a natural monopoly? Explain.

3. In the Application "The Botox Patent Monopoly," what would happen to the equilibrium price and quantity if the government had collected a specific tax of $75 per vial of Botox? What welfare effects would such a tax have?

Consider the inverse demand curve p = 144 - 20 and the cost function C(Q) = 100+ 4Q. If the market were competitive, calculate the incidence of a specific tax, t = 6, that falls on consumers. Calculate the incidence of the same tax if the market were instead a monopoly.

Draw an example of a monopoly with a linear demand curve and a constant marginal cost curve. a. Show the profit-maximizing price and output, p* and Q*, and identify the areas of consumer surplus, producer surplus, and deadweight loss. Also show the quantity, Q, that would be pro duced if the monopoly were to act like a price taker.. b. Now suppose that the demand curve is a smooth concave-to-the-origin curve (which hits both axes) that is tangent to the original demand curve at the point (Q, p"). Explain why this monopoly equilibrium is the same as with the linear demand curve. Show how much output the firm would pro duce if it acted like a price taker. Show how the welfare areas change. c. How would your answer in part a change if the demand curve is a smooth convex-to-the-origin curve (which hits both axes) that is tangent to the original demand curve at the point (Q", p*)?

AT&T Inc.. the large U.S. phone company and the one-time monopoly, left the pay-phone business because people were switching to wireless phones (Crayton Harrison, "AT&T to Disconnect Pay Phone Business After 129 Years," http://www. Bloomberg.com, December 3, 2007). The number of wireless subscribers quadrupled in the past decade: 80% of U.S. phone users now have mobile phones. Consequently, the number of pay phones fell from 2.6 million at the peak in 1998 to 1 million in 2006. (But where will Clark Kent go to change into Super man now?) Use graphs to explain why a monopoly exits in a market when its demand curve shifts to the left.

Suppose that the inverse demand for San Francisco cable car rides is p = 10 - Q/1,000, where p is the price per ride and Q is the number of rides per day. Suppose the objective of San Francisco's Municipal per day. Authority (the cable car operator) is to maximize its revenues. What is the revenue maximizing price? Suppose that San Francisco calculates that the city's businesses benefit from tourists and residents riding on the city's cable cars at $4 per ride. If the city's objective is to maximize the sum of the cable car revenues and the economic impact, what is the optimal price?

A profit-maximizing monopoly produces a good with constant marginal cost, MC = 20, that it sells in two countries. The inverse linear demand curve is P₁ = 60 Q₁ in Country 1 and P2 60 - 20₂ in = Country 2. What is the equilibrium price and quantity in each country if resale between the countries is not possible? Does the monopoly price discriminate?

Hershey Park sells tickets at the gate and at local municipal offices to two groups of people. Suppose that the demand function for people who purchase tickets at the gate is QG = 10,000 - 100pc and that the demand function for people who purchase tickets at municipal offices is QG 9,000 - 100PG = The marginal cost of each patron is 5. a. If Hershey Park cannot successfully segment the two markets, what are the profit-maximizing price and quantity? What is its maximum pos sible profit? b. If the people who purchase tickets at one location would never consider purchasing them at the other and Hershey Park can successfully price dis criminate, what are the profit maximizing price and quantity? What is its maximum possible profit?

A profit-maximizing monopoly produces a good with constant marginal cost, MC = 20, that it sells in two countries. The inverse linear demand curve is Pi = 60 - 20, in Country 1 and P2 = 40 - ₂ in Country 2. What is the equilibrium price and quantity in each country if resale between the countries is not possible? What is the equilibrium price and quantity in each country if resale between the countries is possible? Compare the two equilibria.

A firm charges different prices to two groups. Would the firm ever operate where it was suffering a loss from its sales to the low-price group? Explain.

A firm is a natural monopoly. Its marginal cost curve is flat, and its average cost curve is downward sloping (because it has a fixed cost). The firm can perfectly price discriminate. Use a graph to show how much the monopoly pro duces, Q*. Show graphically and mathematically that a monopoly might shut down if it can only set a single price but operate if it can perfectly price discriminate.