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# Microeconomics

(PGP I)
Problem Set VI

1. Assume that a monopolist sells a product with a total cost function TC = 1,200 + 0.5Q2 and
a corresponding marginal cost function MC = Q. The market demand curve is given by the
equation P = 300 - Q.
a) Find the profit-maximizing output and price for this monopolist. Is the monopolist
profitable?
b) Calculate the price elasticity of demand at the monopolists profit-maximizing price.

2. A monopolist faces a demand curve P = 210 - 4Q and initially faces a constant marginal
cost MC = 10.
a) Calculate the profit-maximizing monopoly quantity and compute the monopolists total
revenue at the optimal price.
b) Suppose that the monopolists marginal cost increases to MC = 20. Verify that the
monopolists total revenue goes down.
c) Suppose that all firms in a perfectly competitive equilibrium had a constant marginal cost
MC = 10.Find the long-run perfectly competitive industry price and quantity.
d) Suppose that all firms marginal costs increased to MC = 20. Verify that the increase in
marginal cost causes total industry revenue to go up.

3. Suppose a monopolist faces the market demand function P = a - bQ. Its marginal cost is
given by MC = c + eQ. Assume that a > c and 2b + e > 0.
a) Derive an expression for the monopolists optimal quantity and price in terms of a, b, c,
and e.
b) Show that an increase in c (which corresponds to an upward parallel shift in marginal cost)
or a decrease in a (which corresponds to a leftward parallel shift in demand) must decrease
the equilibrium quantity of output.
c) Show that when e 0, an increase in a must increase the equilibrium price.

4. Imagine that Gillette has a monopoly in the market for razor blades in Mexico. The market
demand curve for blades in Mexico is P = 968 - 20Q, where P is the price of blades in cents
and Q is annual demand for blades expressed in millions. Gillette has two plants in which it
can produce blades for the Mexican market: one in Los Angeles and one in Mexico City. In
its L.A. plant, Gillette can produce any quantity of blades it wants at a marginal cost of 8
cents per blade. Letting Q1 and MC1 denote the output and marginal cost at the L.A. plant, we
have MC1(Q1) = 8. The Mexican plant has a marginal cost function given by MC2(Q2) = 1 +
0.5Q2.
a) Find Gillettes profit-maximizing price and quantity of output for the Mexican market
overall. How will Gillette allocate production between its Mexican plant and its U.S. plant?
b) Suppose Gillettes L.A. plant had a marginal cost of 10 cents rather than 8 cents per blade.