1. A monopolist faces a market demand curve given by
$Q = 70 - p$
(a) If the monopolist can produce at constant average and marginal costs of $AC =$
$MC = 6$, what output level will the monopolist choose to maximize profits? What
is the price at this output level? What are the monopolist's profits?
(b) Assume instead that the monopolist has a cost structure where total costs are
described by $C(Q) = 0.25Q^2 - 5Q + 250$. If the monopolist still faces the market
demand curve $Q = 70 - p$, what price-quantity combination will be chosen to
maximize profits? What will profits be?
(c) What is consumer surplus in each of the above two cases?
2. Suppose the government wishes to combat the deadweight loss caused by a monopoly
through the use of a subsidy. Consider the use of a lump-sum subsidy and a per-unit-of-
output subsidy. Will one of these subsidies achieve the government's goal? If so, how?
Use a graph to explain your answer.
3. Explain (perhaps using a graph) how the elasticity of demand and the elasticity of supply
will help determine the deadweight loss in a market with a monopoly seller.
4. Consider a market with a monopsony buyer (such as, for example, a market in which
companies produce inputs to production for a monopoly producer). In such a market,
the monopsony buyer has control over prices and quantities (much like a monopolist
does). Create a model that explains the decision faced by the monopsonist, and describe
how it is similar to the decision faced by a monopolist.
