Question 1:

Assume that market supply and demand conditions for a product are

QS=4P (Market Supply)

QD=240-4P (Market Demand)

where Q is quantity of products, and P is the price per unit.

(1). Calculate the equilibrium price/output solution.

(2). How much consumer surplus, producer surplus, social welfare is produced at this activity level?

(3). Now suppose that the market is run by a profit-maximising monopolist, calculate optimal price-output combination for the monopoly firm.

(4). Calculate the new consumer surplus, producer surplus, social welfare in the monopoly market.

(5). Calculate consumer deadweight loss, producer deadweight loss, and total deadweight loss in the monopoly market.

(6). Calculate total loss of consumer surplus in the monopoly market.

(7). Calculate the wealth transferred from consumers to producer, and net change in producer surplus, if the market is run by a profit-maximising monopolist.

Question 2

Assume that the total revenue (T R), marginal revenue (MR), total cost (T C), and marginal cost (MC) functions of a monopoly firm are:

T R=220Q-0.001Q2

MR= T R Q =220-0.002Q

T C=1,000,000+20Q+0.004Q2

MC= T C Q =20+0.008Q

(1). Compute the optimal monopoly price/output combination.

(2). Calculate the firm's maximised profit. If the company has $5 million invested in plant and equipment, what is the rate of return on investment?

(3). Assuming that the public utility commissions want the firm to provide more products to customers at a lower price, and specifies that a 10% rate of return on total assets is fair for the firm, what is the appropriate price/output combination and profit level for the firm in this case?