# Problems in market structures

Discuss problems with market structures, oligopoly, monopoly etc.

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Consider a monopoly where the inverse demand for its product is given by P = 50 - 2Q. Total costs for this monopolist are estimated to be C(Q) = 100 + 2Q + Q2. At the profit maximizing combination of output and price, deadweight loss is

A. $32

B. $64

C. $128

D. Cannot be determined with the given information

TR=P*Q=(50-2Q)*Q

MR=dTR/dQ=50-4Q

MC=dC(Q)/dQ=2+2Q

For profit maximization, MR=MC so we have

50-4Q=2+2Q

Solving we get Q=8 and P=34

Instead if the market is competitive, we have P=MC

So 50-2Q=2+2Q, solving we get

Q=12 and P=26

MC when Q=8 is 2+2*8=18

Deadweight Loss = 0.5*(34-26)*(12-8)+0.5*(26-18)*(12-8) = $32

Answer: A $32

Which of the following formulas correctly measures the profit of a monopoly?

A. π = TR - TC

B. π = (P - ATC)Q

C. π = (P - AVC)Q

D. π = TR - TC and π = (P-ATC)Q

Answer: D π = TR - TC and π = (P-ATC)Q

Which of the following are not price setting oligopoly models?

A. Stackelberg

B. Cournot

C. Bertrand

D. Stackelberg and Cournot

Answer: D. Stackelberg and Cournot

In a market where two firms compete by setting quantity, the Cournot equilibrium has which of the following characteristics?

A. The two firms reaction functions intersect

B. There is no incentive for the two firms to collude

C. The two firms isoprofit curves intersect one ...

#### Solution Summary

Problems in market structures are summarized in this solution.