MICRO: PROBLEM SET 1

LUCTA
MARANER
SOLARI
 Microeconomics 1

Problem set 1:

1. A monopolist faces an inverse demand given by 𝑃 = 250 − 0.25𝑄 where 𝑄 is monthly

production and 𝑃 is the price in euros per unit. The monopolists’ cost function is given by 𝐶 =
120𝑄 + 2,500.

a. Assuming that the monopolist maximizes profits, what is the level of production, price, and
a.

total profit per month? Calculate the deadweight loss of this monopoly. Represent graphically.

Mm (250 -0.25a).0 -(1200 2500);

=
+

nm 2500 =

-0.2502-1209 -
2500;

nm 1309 =
-
0.2582 -
2500 CPROFITS FNC. (

MAXIMIZING PROFITS:
*
130-0.50 0;
am= ia* 268
=
=

0;
=

p 250= -
0.259;p 250 = -
0.25.(260);P 250 =
-
65;p 185- =

↑* 185.260 -33700 14.400

=
=
+*14.400
=

The total profits per month are 16.900 E selling 260 units at a price of185

DEADWEIGHT LOSS:
P PROFITS

DWL
=

05
=
8450 DWL
= 250 =

h 185 -120 65;b 520 260 260

= = = - =

pM 185

i
= ------

·
MC D ;Mc=250-0.250;
=

120 250-0.25Q:0.25Q=
=
130;

a
237;
=
a 520
=
120 MC

DWL 8450

I..
=

MR D

⑧
I N
Q
268 500 1000

b.
17. If the monopolist were charged a €5 per unit tax, by how much would the price increase?

Now the costs are:((a) 1200 2.500 50 = +

+

((a) 1250 2.500

=
+
 2
+* (250-0.25G).a-(1250 2500); Ac 125
80 135
=
+ =
+ =

+M 2500-0.2502-1250-2500;
=

+* 1250 0.2502 2500

= - -

max H: * 0; = 125 -0.50 0;a

=

5:a*250
= =

p 250
= -
0.25.(250);P 250 = -
62.5; P 187.5 =

P The price will increase in

(187.5 -185 2.5) 2.5

=
=

250 =

PROFITS

A pM!
I pM

·
=

MC T+

125
120 MC

MR D

⑧
I N
Q
500 1000

2.
2. Suppose a firm that is the only producer of very thin lenses needed in the industry for
mobiledevices.The production function for such lenses is 𝑄 = 50𝐿.The firm faces a demand
function for lenses that is expressed by the function: 𝑄 = 10,000 − 10𝑃 . The labor supply of
this market is 𝐿 = 𝑤/250. Considering that this firm is the only one demanding labor:

a. How many hours of labor must contract the firm and to which salary?
A.

FM IC
OM IC
=

=
-
"MRR:FM i MR. MPL MEL
=

p 1.000
=

- :TR (1.000
=

-8).Q; TR 1.0000-0.1a2
=

MR E 1.000-0.20;MP
=
= =

50
=
 3
MRPL MR. MPc=(1000-0.201.50;
=

MRPL 50.000-10Q;
=

TE W(LI.2;TE (250L).2;TE 25022

= = =

MRPL 50.000 =
-
10.(50L);
-IE
w(L) 2502;ME
= =

205002; - ME=500L 50.000-500L

MRPc=

MRPL MEL =
;50.000 -5002 5002; 1.0002 50.000;
=
=

50.000
1 = -
50iL 50 MEL
=
=

1000 w

50.000

-mo.
L 50
=
w(50) 250.(50);w 12.500
- = = AE LS =

AE E = AE
= =
2502
=

MRPL LD
=

L
100
L 50=

b.
18. Assume now that the government implements a minimum wage.How many
workers will the firm now hire if the minimum wage is set at $15,000?

MEL MRPL min.

=
Wage

·
50.000 50.000-500L=15.000;

-.
AE LS =
35,000 5002;
=
200;
=

/FAMILIES( 500

L 70
=

Wmin
The firm will hire 70
workers. ( 70) =

(FIRM)
MRPL LD
=

1 50(=
= 70100
 4
3.
3.A monopolist sells its product in two markets whose inverse demands are given by
𝑃 =100−𝑞 and 𝑃 =100−4𝑞 .The total cost function is 𝐶(𝑄)=20𝑄, where
𝑄 = 𝑞1 + 𝑞2.

a. Find the monopoly equilibrium when she can fix a unique two-part price because
A.

demands cannot be distinguished. What is the deadweight loss?.

P, 100 Q1 Q1 100 P1
i
= -
= -

P2 100 -402 ia2 25

4P2
= =
-

Demand 1 access fee: CS the

at price of 20E.

100
P cs 1.80-1400
=
3200
= CS1=3200t

Accessfee (lump-sum feel:F,3.200E

CE51
=

20 MC AC

%o
=

Q
100
Demand 2 access fee:CS when P=
207;

P (100 -
20). 20 1600
100 c =
= =
800;(32=800
=
-
F2=800t

CE2
MC AC

9
20
=

Q
2025

(100 P).(25
-

-1,P(
·
Market 2 has a lower access fee: F
=
2
2

i 2 (Fz)
=
+ (P -
MC). (Q2) (P MC). (a) +
-

4,P)) (P
(100 P.(25
I
- -

H 2: 20).(25
P) cP 201.(100-P),
= -
- +
+ -

i (100 P).(25
= - -

4P) +
(P 20).(25 - -

4b) (P 20). (100 p);

+ - -

H 2500 25p 25P

1,p 25p 500
1 5P + 100-2.000-PZOPi
=
- -
- - + + +

i 100p =
-
p2
 5

=
p5o
100,
=

0;100 -21 0; p
= =

LUMP-SUM FEE:

-1,P(
50).(25 5501 50.12.5 55
(100 P).(25
-

100 - -

=
312,5
F
=

= i F=
2

F 312.5
=

&1 100 = -
50 50 =

Q1 50
=

a 25
1 (50) 12.5 Q2 12.5
= =
= -

H 2. (312.5) 150 -201-(50) (50 -20).(12.5) 625 1500 375 2500

=
=
+ + = + +

i 2500 E
=

If
the firm charge all markets the same fee, the fill will sell to both markets.

P P
DWL: t.150-20),12.51e!
100 100 DWL 3
30
=

= 0; DW) 450 +112.5

=

-Fer
+

2 2

DWL 562.5 =

50 ----

20
↑ DWL
0 M2AC 20 MCAC
=

I
=

mi

d Q it d 25
Q

E
100

cs =
50 115-34.5
=

0.5
=

b.
B Suppose now that the monopolist can practice first-degree price
discrimination. Find the equilibrium and indicate how much profit the
monopolist makes.

P, 100
= -
Q1 Q1 100
i
= -
P1 1st degree price discrimination:PERSONALISED
P
↑2 100-492 an 25-
P2 loo (A) (B)
i

100
= =

20

! 0
a

100
Q
MCAC 20
=
.

12.525
MCAL

Q
=
 6
MARKET
A 1

MC P(Q);20 100 Q; Q1 100-20

= = =
-

Q1 80 =

P
100
-
PS:Total Welfare=
H
en
e

20).80
H (100
-

=
3200 =

2
20 MC AC

!
=

PS 3200 =

CS 0 =

DWL 0 = Q
i 3200 = 100
do

B MARKET 2
e
me

Mc=PCQ);20 100-4Q; =

Ya 100 20;a
09 20;Q2 20
= = = =
-

(100 20). 20
-

H =
=800
2 P
PS Total Welfare i
=
=

mere

M 800
=

PS 800=

CS 0
·

DWL 0 =

!
20 MC AL
=

Q
25

TOTAL PROFITS FIRM:HT

OF THE M1 M2 3200 800 4000 E
=
= +
= +

e
ern
e

#T 4.000 t=
 I
c. In case the monopolist has all available information about market demands,
C.

find the two-part price charged in each market. What is monopoly profit? And
the deadweight loss?

P1 100 = -
Q1;Q1=100-P1:((Q) 200:Q Qu+Qu = =

P2 100 -402 ia2 25

4P2
= =
-

The firm will set up the price equal to

per-unit marginal cost(PMC)
=

There is no profitgenerated selling units CPFACS. So all profits will

=
o
from come
20.
20; Mc=
from the access fee.
P P
100 100

CNO PROFITS) ->

20 MC AC 20 MC AC
=

i I
=

2 Demand 1 access fee: CS the

at price of 20E. Q Q
80 100 2025

1.8 =
6408
P cs = =
3200
= CS1 3200 E
=

100

Accessfee (lump-sum feel:F,3.200E

Fr
=

So,CS 0 =

20 MC AC

p
=

Q
Demand 2 access
100
CS ree: when p=
207:

P (100 -
20). 20 1600
100 C =
=
800; (32 800
= =

E F2 800E
=
=

So,CS 0
=

Fz
MC AC

.
20
=

MONOPOLY PROFIT - H* F, =
+ E 3.200 800 4.000
= +
=
= 4*4.000 E

DWL - There is no DWL. (ANL 0) =

d.
d From the above pricing strategies, which one is preferred by
the monopolist?
Which is preferred by consumers? Why?

Monopolist
·
will prefer the strategy the 1st
of degree price discrimination because they
obtain the higher profits and the higher producers Surplus,
.
consumers will prefer the uniform two-parttariff., because his CS is bigger.
 ⑧
4.
4. The market for smartphones comprises two firms, Apple (A) and Samsung (S).
Both firms have the same constant marginal cost of production, which is equal to
2 €. The demand for smartphones is given by 𝑄 = 100 − 5𝑃, where 𝑄 = 𝑞𝐴 + 𝑞𝑆.

a. Solve for the equilibrium quantity produced by each firm and the equilibrium
&.

price when firms when firms take their quantity decisions simultaneously and
independently. What are equilibrium profits? Represent the firm equilibrium in the
reaction function space.

a+ 100 50; 5P 100 Q;P 20

faiP 20
f.(a1 an) Mc 2
= - = =
- - = - +
=

INDEPEN DET and SIMULANEOUSLY

COURNOT) -> DUOPOLY (EVERYTHING IS SYMETRIC)

H 120 =
-

ja Ian).q1
-
-za H 2001
i
=
-

ja I. Q.Qu-2a; -

(H 180 -ja-, aan];= 18-2a,-jan;

anata.
0;
=

PROFITS FNC. (H1 M2) =

Q1 45
= -

Q2 Ri(qu)
REACTION FNC.

[M 18a
=
-

ja -

aan]; Q2 45
=
-
Q ReCq1)
1
REACTION FUNCTION SPACE
<SAMSUNG)
COURNOT EQUILIBRIUM
42
90-
Re(92) Q 45-=

1 Q2 i

Q 45
1.145 Qi);
= - -

45-
a 45 22.5 a1;
30-COURNOT
+

EQ.
= -

↓ 3Q1 4 1 30
1
Re(q1) 22.5;Q
=
=
= =

P 91
045 a (APPLE)
Q1 Q2 30 = =
(Q =60)
+

P 20
=
-

faip 20
= -

(a a2)
+
i
=
Mi(8 2).30 6.30 180 H,=
180 π,
= = =
-

p 20
1.(60); P 20 12; P 8
= - = =
-

HT 180.2 360
=
=
4 =360 +
 9
b.
D. Solve for the equilibrium quantities and the equilibrium price when firms
decide sequentially their quantity levels. Consider that Apple is the market
leader. What are the profit levels of each firm? Represent the firm equilibrium
in the reaction function space.
> APPLE: leader
STACKELBERG DUOPOLY > SAMSUNG:follower

92 45
Qu RCqn)
[H, 180 a Ian. Qu];
=
- = -
-

We solve it by backward induction:So we introduce the reaction fnc. the follower

of in the profit

Anc. of the leader.

Hape 18Q
Q Ian.(45- Qa);
=
- -

i 18a
Ian- qa+
a?: [ME qa Q2] APPLE cleaders
HENC of
=
=
-

·
= 0;9
-

Qn 0;Qa=
=
9.5;QA 45 =

6 QA

a = 45 -

2(a);a 45 5(45);a= 22.5=

-
=

QT 45 22.5 67.5
=
+
=

p 20
7a;p 20
j(67.5);p 6.5
= - = - =

77
3
=
I 16.5 -2).45 202.5 202.5 It 202.5 101.25 303.75
=
= = =
+

ME (6.5-2).
=
22.5 101.25
=

RE101.25
=

Mi 303.75
=

ISAMSUNG) (FOLLOWERL
Q2

45-

22.5 --
STACKELBERE EQUILIBRIUM

! I Q: (APPLE) (LEADER)
45 90