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?