Economics 235 Problem Set 1
Economics 235 Downside Set 1 Due 2pm on February 11, 2015 Present all work for full credit score. Submit in school or electronically as a .pdf le. Suppose US Airways is a monopolist airline from Philadelphia Airport, and PECO Vitality is a monopolist electrical energy provider for Philadelphia residents. US Airways faces inverse demand curve PUSD(Q) = 100 Q whereas PECO faces inverse demand curve PPECOD(Q) = 100 3Q: Each rms have price perform C(Q) = zero:5Q2 + 50. 1. Elasticity and E ciency. (a) Which rm faces a extra elastic demand curve? (b) Recall from Econ 101 monopolist's provide curve is its marginal price curve. Specific every rm's provide curve as a perform of Q, PS(Q).(c) For every rm, what value and amount ranges maximize complete welfare? (complete welfare is the sum of producer and shopper surplus). How is that this welfare allotted between customers and producers? (d) How do these costs and portions examine to the aggressive equilibrium value and amount? 2. Present that the comparability in Query 1 generalizes. In different phrases, xing the most willingness to pay at 100 and the availability curve at what you derived partly (b), suppose a rm faces demand curve PD(Q) = 100 aQ for some a > zero. (a) Is the elasticity of demand rising or lowering in a? (b) Is the utmost complete welfare rising or lowering in a? Show and provides financial instinct to your end result. (c) Is the share of the excess (p.c of the full surplus) producers obtain rising or lowering in a? Show and provides financial instinct to your end result. three. Monopoly. (a) Calculate the monopoly value and amount traded for US Airways and PECO. Is the monopolist value mark-up bigger within the airline or electrical energy market, in comparison with the aggressive equilibrium? Why? How concerning the monopolist amount discount? (b) What professional ts do US Airways and PECO earn as monopolists?(c) Calculate the patron surplus, producer surplus and lifeless weight reduction (DWL) on the monopoly value. Is producer surplus equal to professional t? Why or why not? (d) Which trade, airline or electrical energy, has the bigger DWL when there's a monopoly? Why? four. Regulation. Suppose Mayor Nutter decides to manage the airline trade in Philadelphia, and tells US Airways that it can pay it s for every unit it sells. (a) Arrange US Airway's new professional t maximization downside. (b) Fixing s, how a lot does US Airways produce? (c) What stage of s will induce US Airways to supply the aggressive equilibrium amount? How a lot does this subsidy price the town authorities? (d) Suppose as an alternative, Mayor Nutter o ers to pay US Airways a lump sum subsidy L, which is the same as the di erence between its monopoly professional ts and aggressive equilibrium professional ts, if US Airways produces at the aggressive equilibrium value. Calculate L. Which choice is cheaper for the authorities?