7. The following graphs show a monopolist and a potential entrant.

a. Label the monopolist’s profit-maximizing price and quantity.

b. Identify a limit price that the monopolist could set to prevent entry.

c. How much does the monopolist lose by setting a limit price rather than the profit-maximizing price? Does that mean that this would be a bad strategy?
8. The following table shows the demand for Good X, which is only produced by two firms. These two firms have just formed a cartel. Suppose that the two firms have a constant marginal cost and an average total cost of $55.

Quantity (thousands of units) Price (dollars per unit)
0 100 1 95 2 90 3 85 4 80 5 75 6 70 7 65

a. What are the cartel’s profit-maximizing output and price?

b. What are the output and profit for each firm?

c. What will happen to the profits of both firms if one of them cheats and increases its output by 1,000 units, while the other doesn’t?

Transcribed Image Text:

MCE P MC ATCE ATC D Q MR Potential Entrant Monopolist