Q1. Monopoly and DWL (Part 1 is 4 points, Part 2 is 4 points) Awell-known publishing company has bought the rights to Ingeborg Bachmann's book, \"Malina\" for 2 million liras. Demand: There are three different groups of readers of this book. Group . The first group of readers are the big fans of Bachmann. Each person in this group will pay up to 160 TL for the book. There are 15,000 readers in this first group. Group Il. A second group of 25,000 people will buy the book if the price is not higher than 130 TL. Group lll. Finally there is a third group readers who will pay only up to 100 TL for the book. There are 20,000 readers in this third group. It costs 60 TL to print and distribute a book. 1) 'What price will the publishing company choose to maximize its profits? Show your work. 2} Will there be a deadweight loss? If yes, how much? Show your wark. Q2. Monopoly (part Gis S points, parts A to F are 2.5 points each) Imagine a monopoly with constant marginal cost of > 0. {No fixed costs.) The market demand is linear: Q(P} =a - bP. Assume afb > c. If decreases A. How will L, the Lerner index, change? Increase / decrease / no change Explain. B. How will the price ({the profit maximizing price for the monopoly firm) change? Increase f decrease / no change Explain. C. How will consumer welfare change? Increase [ decrease / no change Explain. Imagine a manopoly with constant marginal cost of > 0. (No fixed costs,) The market demand is iso-elastic: QP) = AP With this demand the price elasticity of demand E; is constant: Ep = a for all p = 0. Assume A >0, a > 1. If c decreases D. How will L, the Lerner index, change? Increase f decrease / no change Explain. E. How will the price (the profit maximizing price for the monopaly firm) change? Increase [ decrease J no change Explain. F. How will consumer welfare change? Increase f decrease / no change Explain. G. Comment: An increase in L, the Lerner index, always indicates a decrease in consumer welfare because of increased market power. For parts A to F, clearly explain your reasoning. Remember: (P - MC)/P = -1/E, is the same condition as MR(g) = MC{q), Ep is the price elasticity of demand. Also remember the short cut we mentioned in the review lecture for computing the profit maximizing price for a monoapoly that faces a linear market demand and has a constant marginal cost