Tuesday, April 7, 2015

2013 Microeconomics Exam FRQ #1

2013 Microeconomics Exam FRQ #1

(a) Assume that the profit maximising monopolist is unregulated. Using the labelling in the graph, identify each of the following.

(i) the monopolist's quantity of output.

It is a profit maximising monopolist so profit maximising is where MR = MC.

Answer - the monopolist's quantity of output is at Q1.

(ii) The monopolists price.
Answer - The monopolists price is at P3.

(iii) The Profit earned by the monopolist.
Answer - Area of Profit, P1,P3,a,c

(iv) The deadweight loss.
Answer - Deadweight loss area (acf)

(b) Now assume that the monopolist can perfectly price discriminate. Using the labelling of the graph, identify each of the following.
(i) the quantity produced
(ii) the total revenue received by the monopolist.

Answer - P4,f,Q3,0   all in red is the total revenue.

(c) Instead, assume the monopolist charges a single price and is regulated to produce the socially efficient quantity. Using the labelling of the graph identify each of the following.
(i) The socially efficient quantity.
(ii) The consumer surplus at the socially efficient quantity.

The socially efficient quantity is allocative efficiency where P = MC or D = MC

Answer - the socially efficient quantity is at Q3 & the consumer surplus is P1,P4,f.

(d) Is the monopolist facing the regulation in part (c) earning positive economic profit, zero economic profit, or incurring a loss. Explain.

The regulated monopolist is making zero economic profit as he is covering his ATC's. 

Answer - the monopolist is making zero economic profit as the price equals the ATC.

(e) Is point f in the elastic, inelastic, or unit elastic section of the demand curve? Explain.

Answer - f is in the inelastic section of the curve as the MR (marginal revenue) is negative.

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