Question 1 [100 word limit for each part]
A profit-maximizing monopolist firm produces widgets (denoted by ) at a constant marginal cost of £20 per unit, and faces a market demand given by: –
= 240−0.4 where is the per-unit price of widgets in pounds.
- a) Calculate the monopolist’s chosen price and quantity, and resulting profits.
- b) Supposethegovernmentcreateslegislationthatallowsforfirmstofreelyenter this industry. What is the perfectly competitive price and quantity equilibrium for the market?
- c) Calculatethedeadweightlossassociatedwiththismonopoly .Explainwhatthis value represents
- Question 2 [100 word limit for each part]Martin has preferences over two normal goods, cheese (variable ) and bread (variable ). He purchases these goods subject to the following budget constraint (numerical values 20, 5, and 3 in £s): 20 = 5 + 3 Martin’s preferences over these two goods satisfy the assumptions of completeness, non-satiation, transitivity.
- a) Draw a diagram that shows the budget constraint, a possible indifference curve, and the optimal choice. Your graph should have cheese on the horizontal axis and bread on the vertical axis. Please include all relevant labels. [10 marks]
- b) What is the marginal rate of substitution between cheese and bread at the optimal consumption choice? Explain what this number means.[10 marks]
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- c) Assumethepriceofcheesedecreasesto£3.Inanewdiagram,use indifference analysis to decompose the total effect of a price change (on cheese consumption) into the income effect and the substitution effect. Make sure these two effects are clearly labelled. [10 marks]
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