1. Suppose that, assuming a firm decides to produce a product, it must build a production facility. The fixed cost of this facility is F = 90. Also, the firm has constant marginal cost, MC = 5. Demand for the product that the firm produces is given by P = 40-5Q.
a) On a single graph, carefully draw the MC curve, the demand curve, and the ATC curve. Your graph should go up to 8 units of output. Please label your graph carefully.
b) How much output will this firm produce?
Suppose the government decides to set the price of the good equal to marginal cost, and subsidize the firm in order to get the firm to produce enough output to satisfy the market at that price.
c) How much should the subsidy be in order to allow the firm to make exactly zero profit.
d) How much consumer surplus will consumers get if P = MC?
2. Suppose there are two types of consumers: Type A and Type B. The demands for a monopolist's product for each type of consumers are given by:
Type A: Q = 90 - 2P
Type B: Q = 60 - 4P
Assume the marginal cost of production is constant and MC = 4, and there are no fixed costs.
a) Suppose the firm is unable to distinguish between the two types of consumers, and therefore cannot engage in price discrimination. Sketch the demand curve facing the firm. Make sure your graph is accurate and carefully labeled.
b) What price will the monopolist charge?
c) How much profit will the monopolist make?
d) If the monopolist is able to charge different prices to each type of consumer, what price will she charge to type A consumers?
e) What is the Price Elasticity of Demand for Type A consumers?
f) If the monopolist is able to charge different prices to each type of consumer, what price will she charge to type B consumers?
g) What is the Price Elasticity of Demand for Type B consumers?