Question

ANSWERS ARE GIVEN. PLEASE EXPLAIN HOW TO GET ANSWER

1. For the next 4 questions, use the following aggreage demand curve: Q = 120 ? 2P. Assume there are 4 identical consumers.

A). If P = $50, then the elasticity of demand ? is

a. -0.5

b. -1.0

c. -2.0

d. Not enough information to determine the elasticity.

e -5 ? Answer

B) If a Monopolist had a marginal cost function of P = 2Q, what would a single price monopolist charge, i.e. what is P M?

a. 20

b. 40

c. 50 ? Answer

d. 48

C). Suppose the Monopolist could use two part pricing, the the price per unit would be and the fixed fee per person would be .

a. 50, 25

b. 48, 36

c. 50, 100

d. 48, 144 ? Answer

D). Suppose the market is a perfectly competitive market with a supply curve P = 0.5Q. If the government imposed a price ceiling of $20, what is the outcome?

a. A shortage of 40 units

b. A surplus eof 40 units

c. P ? = 30, Q? = 60

d. There is not enough information to solve.

e. A shortage of 60 units. ? Answer

Answer 1

A) Elasticity of demand is given by: e = dQ/dP. P/Q

At P = 50, Q = 20.

Thus, e = (-2)(50/20) = -5

Ans. (e) -5

B) Given marginal cost is P = 2Q, the equilibrium in a monopoly is given at a point where MC = MR

Thus, 2Q = 60-Q which gives Q = 20 and P = 50.

Ans (c)

C) If the monopolist uses two part pricing, it will set the usage fee (price per unit) equal to the marginal cost. Thus, usage fee = 2Q = 2(24) = 48

and the entry fee (fixed fee per person) is determined by calculating the area of the consumer surplus at this price. Thus, CS = 1/2(60-48)(24) = 144.

Ans. (d)

D) In a perfectly competitive market, equilibrium price and quantity are determined at a point where Demand = Supply. Thus, 60-Q/2 = Q/2 or Q = 60 and P = 30.

With a price ceiling of P = 20, demand = 80 and supply = 40. Thus, there is a shortage of 40 units.

Ans. (a)