1. Suppose that market demand for a good is
QD(P) = 480 − 2P.
The marginal cost curve is MC(Q) = 2Q. Calculate the deadweight loss resulting from
a monopoly in this market.
2. Explain why a monopoly that knows the demand curve of identical consumers can set a two-part tariff with the lump sum tariff equal to the total amount of potential consumer surplus.
3. Explain why each of the following is a positive/negative externality: (1) The exhaust from automobiles, (2) Restored historic buildings, (3) Barking dogs, (4) Research into new technologies.
4. Assume a monopolist faces a market demand curve
P = 100 − 2Q,
and has the short-run total cost function
T C = 640 + 20Q.
What is the profit-maximizing level of output? What are profits? Graph the marginal
revenue, marginal cost, and demand curves, and show the area that represents deadweight loss on the graph.
5. Suppose a monopoly firm with a constant marginal cost of 10 dollars faces an inverse
linear demand function, P = 50 − Q. What would the profit-maximizing price and
quantity be if its marginal cost doubled? How does it compare to the outcome with
the original marginal cost?
6. Suppose a legislator introduced a bill that would decrease patent life for new drugs
from 17 years to 10 years, based on the argument that it would reduce deadweight loss
through lower prices. What argument could you make against such a change?
7. In most cases, when a consumer purchases season tickets for a professional sports team,
the consumer must purchase pre-season games as well at the same price as regular
season games. What type of pricing strategy does this represent?
8. Why do firms place ads with coupons in the paper instead of simply offering a sale
price in the same ad?
9. Solve the following game between Player 1 (who chooses between rows) and Player 2
(who chooses between columns) using iterated elimination of strictly dominated strategies. Can you make a good prediction for this game? Explain.
L C R
R1 (2;1) (4;0) (1;0)
R2 (0;6) (1;0) (2;2)
R3 (3;1) (6;1) (2;2)
R4 (6;0) (0;0) (3;1)
R5 (5;0) (-1;6) (2;2)
R6 (7;-1) (4;-1) (2;0)
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