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Economics 100C: Microeconomics C

Midterm 1

October 22, 2012

1. (16 pts) The inverse demand curve and a monopolist’s marginal cost curves are graphed below.

MCQ)

PD(Q)

a. If the graph is for the long run and the monopolist does not have any quasi-fixed costs, illustrate the profit maximizing quantity, price and the resulting producer surplus. You can add a rough sketch of any additional curves you need to find this information.

b. If, instead, the marginal cost curve was for the short run with a fixed cost, would producer surplus be more, equal or less than the surplus you indicated in (a). Show your reasoning.

c. If, instead, the marginal cost curve was for the long run with a quasi-fixed cost, would producer surplus be more, equal or less than the surplus you indicated in (a). Show your reasoning.

2. (32 pts) A monopolist has the long run total cost function of: C (Q ) =〈

Inverse market demand is equal to PD (Q) = 120 2Q .

a. Assuming no shut down find the monopolist’s profit maximizing price and quantity.

b. Will the monopolist shut down? Briefly explain.

c. Find the efficient quantity in this market. Can the government move this market to the efficient quantity by imposing a price ceiling? Briefly explain. If it can, determine the level of the price ceiling. If it cannot, determine the price ceiling that will move output closest to the efficient quantity.

3. (28 pts) A firm has a long run cost function of C(Q) = 2Q2 . Inverse market demand in this market is PD(Q) = 120 – 2Q. The firm is able to practice first degree (perfect) price discrimination.

a. Find the profit maximizing quantity in this market. Describe pricing.

b. Determine consumer surplus, producer surplus and deadweight loss.

c. Suppose the government imposes a per unit tax of $2 per unit in this market. Find the new profit maximizing quantity, consumer surplus, producer surplus and deadweight loss.

4. (24 pts) Suppose UCSD has a monopoly on photocopying on campus. They are able to separate the campus into two separate markets, one at the library (market

1) and one at the Price Center (market 2). Their profit maximizing prices are $0.06 per page at the library and $0.10 per page at the Price Center. UCSD’s long run cost function is C(Q) = 0.04Q.

a. In which market is inverse demand more elastic? Give a brief, intuitive explanation.

b. Determine each market’s elasticity of demand at UCSD’s profit maximizing price/quantity combinations.

c. Suppose a referendum is passed requiring UCSD to charge a uniform price for all photocopying on campus. Give brief, intuitive explanations for the directions of change for consumer surplus at the library, consumer surplus at the Price Center, producer surplus and deadweight loss. If any of these directions cannot be determined briefly explain why.