Faculty of economics and political Science

Economics Department

Industrial Organization
Fall 2016

Tutorial Sheet 1

1. A monopolist produces at a constant average (and marginal) cost of AC = MC = 5. The firm faces
a market demand curve given by Q = 53 - P. Calculate the profit-maximizing price and quantity
for this monopolist. Also calculate the monopolists profits.

2. Assume the following functions apply to the market for Blueberry Smoothies:
P(Q) = 100 5 (Q)
TCi (qi) = 10 qi
a. If this industry is characterized by perfect competition, find the equilibrium level of
industry output (QE), the equilibrium price (PE) and determine if there are any profits in
equilibrium. Also, determine the level of total social welfare (CSE+PSE) for this efficient
equilibrium.
b. If this industry is served by a monopolist, find the monopolys equilibrium level of
industry output (QM), the equilibrium price (PM) and determine if there are any profits in
equilibrium. Also, determine the level of total social welfare (CSM+PSM) for this
monopoly equilibrium.
c. Determine (DWL) for the monopoly equilibrium case.
d. Can you see any relationship between the competitive level of output and the monopoly
level of output?

3. The company of Starbucks faces the following functions for the market of Coffee:
QS = 10P (Market Supply)
QD = 120 - 40P(Market Demand)
a. Graph and calculate the equilibrium price/output solution. How much consumer
surplus, producer surplus, and social welfare is produced at this activity level?

b. Use the graph to help you calculate the quantity demanded and quantity supplied if the
market is run by a profit-maximizing monopolist. (Note: If monopoly market demand is
P = $3 - $0.025Q, then the monopolists MR = $3 - $0.05Q).
c. Use the graph to help you determine the deadweight loss for consumers and the
producer if Starbucks is run as an unregulated profit-maximizing monopoly.
d. Use the graph to help you ascertain the amount of consumer surplus transferred to
producers following a change from a competitive market to a monopoly market. How
much is the net gain in producer surplus?