1.

(04.01, 04.02, 04.03 HC) Because of a patent, Company X has a monopoly on a new product, which it brands Kohi. Company X is a profit-maximizing firm and is incurring economic losses in the short run.

1. Draw a graph of Company X's market for Kohi.
   1. Label the profit-maximizing price (Pm).
   2. Label the profit-maximizing quantity (Qm).
2. Shade the area of consumer surplus.
3. Why would Company X continue to operate in the short run despite earning negative economic profit?
4. Assume that Pm = $8 and the average total cost at the profit-maximizing quantity is $10. If the firm is incurring $400 in economic losses, how many units of Kohi is it producing?
5. On your graph from part (a), label the allocatively efficient price (Pe) and quantity (Qe).
6. Is Company X producing in the elastic or inelastic range of its product's demand? Explain.
7. Based on the information from part (d), what is the total revenue of Company X?
8. Assume that Company X becomes able to perfectly price discriminate.
   1. What would happen to its output?
   2. What would happen to consumer surplus?

(10 points)

2.

(04.04 HC) Epsilon Electronics is a firm operating in a monopolistically competitive market. It is currently earning positive economic profits.

1. Draw a fully labeled graph of Epsilon Electronics. Label the profit-maximizing quantity (Qm) and the profit-maximizing price (Pm).
2. Shade the area of profit.
3. What would happen to Epsilon Electronics' profits in the long run? Explain.
4. Does Epsilon Electronics achieve productive efficiency in the long run? Explain.

(5 points)

3.

(04.05 HC) The good Luxurum has no close substitutes and is only supplied by two companies, Gamma Enterprises and Delta Depot. They are considering whether to offer Luxurum in different colors or keep the original single color of its material. The following payoff matrix shows their estimated profits.

	Delta Depot
Gamma Enterprises
	Multiple Colors	One Color
Multiple Colors	$90, $95	$25, $115
One Color	$105, $65	$60, $55

1. What should Gamma Enterprises do if Delta Depot chooses to offer multiple colors? Explain using the figures from the payoff matrix.
2. Does Delta Depot have a dominant strategy to offer multiple colors, keep the single color, or no dominant strategy?
3. Assuming no cooperation, what will the profit be for each firm?
4. The cost of the materials needed to offer other colors goes up by $20. Draw a new payoff matrix reflecting the change.
5. Assuming no cooperation, what will the profit be for each firm after the cost increase?