Exercise 1 A monopolist has an inverse demand curve given ... - IDEA

∆π(y 1 ,y 2 )
∆(y 1 +y 2 ) = 0 ⇒ 10 − 2 3 y 1 − 2 3 y 2 − 3 = 0 ⇒ y 1 + y 2 = 21 2
∆π(y 1 ,y 2 )
= 0 ⇒ 10 − 2y ∆(y 1 +y 2 ) 3 2 − 2y 3 1 − 4 = 0 ⇒ y 1 + y 2 = 9
Therefore, only firm 1 will produce a quantity of 10.5. Firm 2 will close
down.
p = 10 − 1(y 3 1 + y 2 ) = 10 − 1 (10.5) = 6.5.
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Exercise 4
Answer T (True) or F (False):
1/ The point where (x 2 1, x 2 2) where MRS=2 and MRT=1 is not efficient because
both consumers could be made better off by increasing the production
of good 1. [True]
2/ Two firms form a cartel. Then, the firm producing more than the
other one does not have incentives to deviate from the equilibrium. [False]
3/ When there is a monopolist in a market, the production level is lower
than in the case of perfect competition. [True]
4/ When a monopolist is charged a tax, she transfers half of it to consumers.
[False]
5/ A monopolist that can discriminate perfectly will extract all of consumer’s
surplus. [True]
6/ Equal division is always fair. [False] [Remember: A fair allocation is
equitable and Pareto efficient].
7/ You like vanilla ice cream. I move to your town and demand so much
vanilla ice cream that its price rises. This is an example of a negative externality
from consumption. [False]
8/ In an economy with production, where the technology exhibits constant
returns to scale, the Second Welfare Theorem of Welfare Economics
holds. [True]
9/ A monopolist charging where the elasticity of demand |ɛ| equals one
is necessarily charging a perfectly competitive price. [False]
10/ A firm creating negative production externalities typically produces
more than the efficient quantity. [True]
Exercise 5: some topics to work...
1/ Compare the shape of the demand curve for a competitive firm and
for a monopolist. Graph them. Explain the difference.
A competitive firm faces a flat demand curve because its production,
which is negligible in the aggregate supply, does not influence the price.
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