Question 1.

Suppose you are working as a consultant for a firm that is a monopoly and is worried about its policies in the short run. What would you recommend in terms of quantity changes (raise, cut, shut down or stay put) and price changes (raise, cut, stay put) in each of the following situations a through c:

a. [5 points] P = $299 MC = $349 AVC = $249

b. [5 points] MR = $150 MC = $100 AVC = $140

c. [5 points] P = $288 MC = $288 AVC = $287

[Note: P = price; MR = marginal revenue; AVC = average variable cost; MC = marginal cost]

Question 3.

[10 points] Suppose Milwaukee Telecom offers its users the option of paying either

(a) $2.00 per minute for telephone service or

(b) a $125 flat charge for a year of unlimited toll-free calls. Consider a customer with an annual demand for telephone service of P = 11 - 0.1Q, where P is the price per minute and Q is the number of minutes of calls made per year.

Calculate the consumer surplus for each of the plans (a) and (b).

Please show all work and explain.

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