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In: Economics

Consider a market with demand given by Q = 10p^−2 . A firm has a constant...

Consider a market with demand given by Q = 10p^−2 . A firm has a constant MC = 2 with no other fixed costs. Use the Lerner Index rule to answer the following questions.

1. (10 points) Suppose the government grants this firm an exclusive monopoly in this market. Find the price-cost margin and the profit-maximizing price.

2. (10 points) Suppose that, in addition to the firm's output, the government always produces output QG = 2p^ −2 where p is the price charged by the firm. Show that the market price and the quantity do not change.

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Rahul Sunny answered 16 hours ago
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