DEPARTMENT OF ECONOMICS

COLORADO STATE UNIVERSITY

EC 102: PRINCIPLES OF MICROECONOMICS

PROBLEM SET 3

1. Monopoly (5 points)

i. Draw a diagram of the profit maximizing monopolist earning positive economic profits in the SR. Show Q* and the profits in terms of P and ATC.

ii. Can this firm continue to earn positive economic profits in the LR? Explain why or why not.

iii. People often say that a monopolist can charge "any" price it wants to. Is that strictly correct? Explain why or why not.

iv. Draw a diagram of a natural monopoly. What options does the government have in regulating the price charged by a natural monopoly? What do you think is the best option? Why?

2. Monopolist Competition (5 points)

i. What are the possible profits the profit maximizing monopolistically competitive firm can earn in the SR?

ii. Draw a diagram of the firm's profits in the LR. Explain why there is only one diagram for the LR.

iii. What is the trade-off for consumers with monopolistic competition?

iv. Explain how monopolistically competitive firms are a hybrid - having characteristics of perfect competition and monopoly.

3. Monopoly power and efficiency (5 points)

i. A perfectly competitive market is economically efficient but a monopoly is not. Explain.

ii. Draw a diagram to illustrate how the PC market achieves the efficient outcome and the monopoly does not.

iii. Monopolies are an example of a market failure. How does the government try to deal with this kind of market failure?

iv. How do economists judge government policies to deal with market failures like monopolies?

4. Firms in the real world (10 points)

i. From the point of view of the owner of a firm what are the advantages and disadvantages of the different types of firms: single proprietorships, partnerships, corporations.

ii. If a corporation wants to raise financial capital, what are its options? How do these options differ?

iii. What are the returns to shareholders called? What are the returns to bondholders called?

iv. What explains the rise of the modern corporation?

v. Transnational corporations are thought to reduce the power of the government and workers. Explain how.