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April 18, 2014

Homework Help: MICROeconomics - Monopoly

Posted by Anonymous on Wednesday, November 18, 2009 at 10:04pm.

Please check my answers and correct them.

Domestic Market:
Pd = 20 000 – 20yd
MRd = 20 000 – 40yd

Foreign Market:
Pf = 25 000 – 50yf
MRf = 25 000 – 100yf

Firm’s production process shows Constant Returns to Scale and it takes $1,000,000 to produce 100 computers.

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a. Find LAC (y) and MC (y). What do the graphs look like?

LAC (y) 1,000,000/100 = 10,000
MC (y) = 0
LAC is a horizontal line at 10,000 and since MC = 0, they share the same line.


b. If the firm maximizes its profits, how many computers for how much would it sell in both the domestic and foreign markets?

Sell 100 computers (since P = min LAC) for $18,000 (Pd = 20000 – 20(100)) in the domestic market and $20,000 (Pf = 25000 – 50(100)) in the foreign market.


c. What is the price elasticity of demand for both markets? Is demand more or less elastic in the market where the higher price is charged?
EDd = -20(18 000/100) = -3 600
EDf = -50(25 000/100) = -12 500
If higher price is charged, the demand is less elastic.

d. Suppose that somebody figures out a wiring trick that allows the firm’s computer build for either market to be costlessly converted to work in the other (ignore transportation costs). Given that the costs haven’t changed, how many computers should the firm sell and at what price should it charge? How will the firm’s profits change now that it can no longer practice price discrimination?

I don’t understand this question.

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