1. Consider a monopoly firm with the total cost function C(q) = 120 + 6q and the inverse market demand p(Q) = 90 − 2Q (a) What quantity will this firm sell? What price will they charge? What will their profit be? (b) What would be the efficient quantity for this monopoly to produce? How much deadweight loss do they create? (c) Do you expect a firm with this sort of cost function to typically be a monopoly? Why or why not?
1. Consider a monopoly firm with the total cost function
C(q) = 120 + 6q
and the inverse market
p(Q) = 90 − 2Q
(a) What quantity will this firm sell? What price will they charge? What
will their profit be?
(b) What would be the efficient quantity for this monopoly to produce?
How much deadweight loss do they create?
(c) Do you expect a firm with this sort of cost function to typically be a
monopoly? Why or why not?
2. Pretend it’s 2005 and people still use iPods. All iPod owners consider
only two options for downloading music to their MP3 players: purchase
songs from iTunes, or copy songs from friends’ CDs (it’s 2005, so people
still own CDs, too). With these two options, suppose the weekly inverse
market demand for the song “All These Things That I’ve Done” by The
Killers (remember, it’s 2005) is
p = 1.98 − 0.00198Q
Suppose the marginal cost to Apple of you downloading a song is zero.
(a) What is Apple’s optimal price of “All These Things That I’ve Done”?
(b) How many downloads of “All These Things That I’ve Done” do they
sell?
(c) Now suppose Apple sells a version of the iPod equipped with software
in which songs played on the iPod must be downloaded from iTunes.
For this iPod, the inverse market demand for “All These Things That
I’ve Done” is p = 2.75 − 0.003Q. What is Apple’s optimal price of
downloads for this player? How many downloads do they sell each
week?
3. In 2009, the price of Amazon’s Kindle 2 was $359, while iSuppli estimated
that its marginal cost was $159.
(a) What was Amazon’s Lerner Index?
(b) What elasticity of demand did it face if it was engaging in short-run
profit maximization?
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