Microeconomics     (Final)

1. Examine whether the following questions are true or false? Explain your answer: 

a) As the demand becomes inelastic the firm has little monopoly power in a monopolistic market.

b) For a firm practicing perfect first degree price discrimination, the lowest price it will charge is the price where the marginal cost and the demand curve intersect.

c) For a monopolist at the profit maximizing output, price equals marginal cost.

d) If the government sets a price where average revenue = average cost (AR=AC) for a natural monopoly, output will be equal to competitive level.

e) In a constant cost industry, an increase in demand will be followed by no increase in supply.

f) It is possible for a perfectly competitive firm to maximize profit by operating on the downward sloping portion of its marginal cost curve.

2. Obtain the industry demand for labor in a competitive factor market on graph and explain.

3. Explain the relationship between short run and long run costs where there is constant returns to scale by using graph.

4. The cost of monopolist is given by C=5Q. The price is determined by the following demand curve: P=53-Q

a) Calculate the profit maximizing price and quantity for monopolist. Calculate monopolist's profit.

b) Suppose a second firm enters the market. Let Q1 be the output of the first firm Q2 be the output of the second firm. The market demand is given by P=53-(Q1+Q2) . Assuming that this second firm has the same costs as the first, find each firms reaction curves.

c) Calculate the Cournot equilibrium. What are the resulting market price and profits of each firm.