Schweighofer-Kodritsch, Li WS 18/19

Advanced Microeconomics
Exercise Sheet 5

Exercise 1 (Monopoly I) A monopolist produces with cost function C(x) = 12 cx2 , c > 0.
Demand is given by D(p) = a − p.

a) Determine supply xm , monopoly price pm and the monopolist’s profit Πm .

b) Show that the price elasticity of demand at pm is greater than one. Explain.

c) Determine consumer surplus CS(pm ) at the monopoly price.

d) Which output x∗ would maximize social welfare? Determine the welfare loss due to
the monopoly structure.

Exercise 2 (Monopoly II) A monopolist operates in a market with inverse demand

P (x) and cost function C(x) = a · C̄(x), where a is positive, and C̄(·) is increasing in x.
Show that an increase in parameter a can never induce a higher monopoly output xm .

Exercise 3 (Two-Product Monopoly I) A monopolist produces two different goods

with cost functions C1 (x1 ) = 45 x1 and C2 (x2 ) = 12 x2 . The consumers’ inverse demand
functions are given by P1 (x1 , x2 ) = 1 − 12 x1 + 18 x2 and P2 (x1 , x2 ) = 2 − 21 x2 + 81 x1 .

a) Are the two goods substitutes or complements? Give reasons for your answer.
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b) Show that the monopolist’s profit is 15
(in the optimum).

c) How much does the monopolist earn from selling good 1? Explain your result!

d) Determine the monopoly price pm 2 if the monopolist can only produce good 2. Com-
pare your result with that from part b).