1) - Cornell University



In Key West Florida, one of the hottest monopoly bars to be seen at is Captain Tony's Saloon which is open every day from 7 P.M. to 2 A.M. Tony's total cost function for making and serving drinks is tc = $2*X, where X is the number of drinks. A slew of economists are in town living it up at the Red Roof Inn. Suppose that a group of them (affectionately known as the "Wild Bunch" and numbering 100) has persuaded Captain Tony to open his saloon exclusively for them from 5 P.M. to 7 P.M one night. Suppose that each member of the Wild Bunch has a demand function for drinks x = 12-2P (P is the per unit price of a drink) for that night. On a graph, illustrate the Wild Bunch's demand curve; Captain Tony's marginal revenue curve; and Captain Tony's marginal cost curve. What is the profit maximizing number of drinks and price charged per drink to these rowdy economists? How much profit does Tony make? Calculate consumers’ and producer’s surplus and dead-weight loss.

1. The Chrome Corporation is a simple monopoly with no fixed costs. Currently, in the short-run, it is producing x' units of output. At x' its marginal revenue equals $4, its total revenue $21, and its marginal revenue function is mr = 10 - 2x. At x', its short run average total cost is at its minimum value. Assuming it is maximizing its profit at x', what do each of the following equal?

the firm's output level;

the firm's price;

the firm's short-run average total costs;

the firm's total cost;

the firm's marginal cost;

the firm's short-run profit.

2. The graph below depicts the demand (D) and cost curves for a firm that sells clothing items over the internet. Suppose the firm currently does not price discriminate. However, the firm is deciding whether to purchase a dataset containing detailed information on their customers and software that would allow them to perfectly price discriminate. The cost of this dataset and software is $8. Should the firm purchase the dataset and software? Why or why not.

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Econ 313 - Wissink – Spring 2006

PS#6 – XtraQ (NOTE WE ARE JUMPING BACK TO TO PS#6)

DUE: In class on the last day of class

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