Rovic Ira A.

Correos Econ102 C - Microeconomics

BS in Management III
Problem Set 5

1. For each of the following statements, please indicate whether they are TRUE, FALSE, or
UNCERTAIN. No credit will be given without an explanation as to why your claim is true.

a. (5 points) If a monopsonist faces a perfectly elastic supply curve, there will be no

deadweight loss relative to the competitive outcome.

TRUE. When a market depicts high supply elasticity, the marginal expenditure (ME)
and the average expenditure (AE) or supply curve do not vary. Hence, the market
competitive value equals to both marginal expenditure (ME) and average expenditure
(AE).

Mathematically, it is expressed as:

AE = ME = competitive market value

b. (5 points) It is economically more efficient to have a monopolist that discriminates

perfectly than a monopolist that sets a single price.

TRUE. Whenever the monopolist discriminates perfectly, the firm’s quantity supplied
will be equal to that of a competitive market. There will be no deadweight loss
incurred by a perfect price discrimination since the resulting outcome will amount to
the total production surplus attributed to the consumer surplus when a single price
is charged, the variable profit from a single price, and the additional incremental
profit from price perfection. In addition, price perfection does not affect the firm’s
total cost; the only relevant cost here in price perfection is the firm’s marginal cost.
Hence, the additional profit attained from an incremental quantity unit due to price
perfection is determined by the difference between the market demand and the
marginal cost.

It is desirable for a firm to keep the demand levels higher than the marginal cost for
it to expand its production.

c. (5 points) In a Cournot duopoly market, the two firms agree to produce half of the
monopoly output level for that market and split the resulting profit. Since the
monopoly profit is the highest profit that can be obtained, the two firms will always
stick to that agreement even if it’s not legally (or in any other way) binding.

FALSE. These two (2) firms will not always act according to the best interests of
another. Both firms would always pursue their self-interests first before anything else
as governed by the invisible hand. If one of the firms produces half of the monopoly
output, the other firm would manufacture more than half of the monopoly output
level to garner more profit than the usual earnings from producing at only half output
 levels. Therefore, there must be a strict enforcement of the binding agreement
between the two firms for them to strongly adhere to the oligopoly terms and
conditions.

d. (5 points) A firm is a monopolist in the market for good X. The government has
perfect information about the marginal and average cost curves of this firm and also
has perfect information about the demand curve for good X. Claim: The economy will
reach an efficient outcome if the government sets a price ceiling that makes the price
equal to the marginal cost, evaluated at the quantity where the marginal cost
intersects the demand curve.

UNCERTAIN. Assume that the government establishes a price ceiling after

determining that the monopoly market incurs average total costs that are higher
than its marginal costs. If this happens, the price will be hindered from transacting
at optimal levels, making it lower than the average costs. Thus, the firm will be
induced to abandon its operations. Firms that go out of business cannot attain
market efficiency since its total surplus has been already lost after its foremost
decision to stay out of business.

This is uncertain since such price ceiling may result in making the prices of the
monopolist’s goods be affordable to its consumers or may hinder market efficiency
like all the price controls always will.