## Transcribed Text

Problem Set:
Remember to give complete explanations on all parts of all problems. Calculations much be
explained.
1. Monopoly (10pts): Suppose you are given the following information for Buzz Soda, a
monopoly which is the sole producer of high quality, highly caffeinated soda. This monopolist
seeks to maximize profits and uses the MR=MC RULE to find its profit maximizing (or loss minimizing)
level of output. Assume the cost data includes both explicit and implicit costs. You must show
all of your work where calculations are required and you must include a brief explanation
of approximately 20-30 words for written answers to receive full credit:
Q (# cases
demanded)
P (price
per case)
Total
Revenue
(TR)
Marginal
Revenue
(MR)
Total Cost
(TC)
Marginal
Cost (MC)
0 $10.00 $0 --- $0.50 ---
1 $9.50 $7.50
2 $9.00 $14.00
3 $8.50 $20.25
4 $8.00 $26.75
5 $7.50 $33.50
6 $7.00 $40.50
7 $6.50 $48.00
8 $6.00 $57.00
9 $5.50 $68.00
10 $5.00 $81.00
a. (6 pts) Write down the formulas for, and then fill in the columns for TR, MR, and
MC. Explain clearly at least one of each calculation needed for each column.
b. (2pts) What is the profit maximizing level of output (Q*) AND price (P*) for Buzz
Soda? Explain your answer.
c. (2pts) Calculate the total economic profit that Buzz Soda would receive by
producing at the profit maximizing output level and price. Show all calculations and
explain your answer.
2. The market shares of firms in three different industries are listed in the table below. Use this information
to calculate the Herfindahl index for each industry.
Firms
Industry
1
Industry
2
Industry
3
1 50 70 35
2 30 20 35
3 10 5 30
4 5 5 –
5 5 – –
Herfindahl
Index _____ _____ _____
a. Calculate the Herfindahl Index for each of the three industries. Show all work and explain your
calculations.
b. Based on the Herfindahl Index, which industry has the greatest market power? Which industry
has the least market power?
c. Based on this example, is the number of firms a good predictor of the competitiveness of an
industry? Explain.
3. Monopoly Graph: 10 pts consider the graph below of a monopoly firm. Answer the
following questions based on the graph. Make sure you give a complete explanation of 20-30
words for each question and explain all calculations.
a. Which quantity, T, V, X or Y, is the profit maximizing quantity of output? Explain
thoroughly. 4 pts
b. What price, G, H, J or K, is the profit maximizing price? Explain thoroughly. 4 pts
c. If this firm is producing the profit maximizing output and charging the profit maximizing
price, are they making a positive profit, a loss, or zero profits? Explain clearly how you know
from the graph. 2 pts

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