Final Questions

Econ515 FINAL EXAM

Name:____________________________________

1.A monopolist has a constant marginal and aver­ age cost of $10 and faces a demand curve of

QD = 1000 - 10P. Marginal revenue is given by MR= 100-1/5Q.

a. Calculate the monopolist's profit-maximizing quantity, price, and profit.

b. Now suppose that the monopolist fears entry but thinks that other firms could produce the product at a cost of $15 per unit (constant marginal and average cost) and that many firms could potentially enter. How could the monopolist attempt to deter entry, and what would the monopolist's quantity and profit be now?

2. The individual demand for a slice of pizza at Sam's Pizza is given by QD = 6 - P. Assume the marginal cost of a slice is constant at $1.00 and the marginal revenue (MR) function is 6 - 2Q.

a. What is the profit-maximizing price and quantity if Sam's sells all slices at a single price? What profit per customer will be earned?

b. Suppose that Sam's decides to sell pizza at cost and charge a fixed price for this option. What quantity will a customer demand at the market price? What is the maximum fixed price Sam's can charge for this option?

3. A monopolist sells in two geographically divided markets, the East and the West. Marginal cost· constant at $50 in both markets. Demand and marginal revenue in each market are as follows:

QE = 900 - 2PE and MRE = 450 - QE

Qw = 700 - Pw and MRw = 700 - 2Qw

.a. Find the profit-maximizing price and quantity in each market. b. In which market is demand more elastic?

4. What are the three tools the Federal Reserve uses to change the money supply and interest rates in the economy? Which of these tools is most important and why?