Problem Set No. 5

Part I

To do this part of the problem set, you will need to use the graph provided on the last page.

1. You have been supplied with a graph showing two isoquants for the production function These isoquants correspond to Q = 1 and Q = 2.

 

a. Draw in the isoquant for Q = 3 on the diagram provided.

 

b. Let the price of N (the input on the horizontal axis) be $4.00 per unit, and let the price of K be $1.00 per unit. Given these prices, find the tangency points between the expenditure lines and the isoquants and fill in the chart below:

 

Q N(Q) K(Q) C(Q)

1

2

3

c. Explain the economic importance of the tangency between an expenditure line and an isoquant.

 

d. What would happen if the price of N decreased to $2.00 per unit while the price of K remained the same (i.e., how will the optimal input proportions change)?

 

 

Part II

The following questions pertain to monopoly

2. List and explain three situations which may lead to the formation of a monopoly.

 

 

3. Explain how the demand curve faced by a monopolist differs from that faced by a single firm in a competitive market.

 

 

4. A monopolist has the following total cost and demand schedules:

a. Determine the monopolist's total revenue for each level of output. On the upper axis (provided on the next page), plot both total revenue (TR) and total cost (TC).

 

b. Determine the marginal revenue (MR) and marginal cost (MC) for each level of output. On the lower axis, plot MR, MC, and the demand curve.

 

c. What level of output will a profit-maximizing monopolist choose to produce? What price will he/she charge?