Additional exercises on pure competition and monopoly

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Additional exercises on pure competition and monopoly Note: the solution to this exercises will be uploaded in early May. I strongly suggest students to attempt to solve the exercises before solutions are made available. 1. For an airline company, the cost of a flight is $50,000, regardless of the number of passengers. The airline flies 4 flights per day. The first and last flights are filled to capacity with 240 people. The second and third flights are only half full (120 passengers). Find the average cost per passenger for each flight. 2. Provide a definition of price elasticity of demand. For a linear demand function, graphically represent the demand curve and its price elasticity. 3. Consider a market with market demand given by function: p(q) = 10 – q. In this market there is one single firm with a Total Cost (TC) function equal to: TC(q) = 4q. • What is the market equilibrium (price and quantity)? Illustrate your answer graphically. • Assume that a tax is imposed on the firm, equal to t = 2 for each unit of quantity produced. What is the new market equilibrium (price and quantity)? • Are price increments due to a tax different in a monopoly setting vs. under perfect competition? Motivate your answer. 4. Explain ‘why’ and ‘under which condition’ a natural monopoly exists. Provide an example. 5. A monopolist has a cost function given by TC = 100 + 4q. What is the optimal level of output and price in the following cases? • Demand curve given by q= 100 – 2p • Demand curve given by q = 10p-3 • Demand curve given by q = 100/p