1. Sarah owns the "Red Star pastry" bakery in Mudgee, a small town in New South Wales. Since it is the only bakery in Mudgee, she benefits from having monopoly power. In baking and selling bread, she incurs a fixed cost of $100 and a marginal cost of $2 per loaf of bread. The demand for Sarah's bread is given by Q = 80 - 4P.
(a) If Sarah sells all her bread at the same price, what is the Deadweight loss created by the bread market?
Options: 324, 162, 81, 12, None of the above.
(b) Suppose the bakery sells all bread at the same price. Sarah wants to go travelling for a year and is looking for someone to take over the bakery for that year. What is the MAXIMUM price somebody would be willing to pay to run the bakery for that year, with full responsibility and incurring all costs and revenues? NB: the person will be trained to run it as efficiently as Sarah does, and faces the same total economic costs as Sarah while running the bakery.
Options: $172, $324, $396, $224, None of the above
2. A monopolist with positive and constant marginal and average cost is initially maximizing profit. Assume that marginal cost increases so that the new profit maximizing price is now 10 per cent higher than the original price. We would expect the quantity sold to:
(a) Increase by more than 10 %
(b) Increase by less than 10%
(c) Decrease by more than 10%
(d) There is not enough information to answer this question