Homework 20

	The Pimax Company is operated as a profit-maximizing monopoly. Its total cost function is: TC = 294 + Q² where TC = total cost in dollars, Q = output in units, and its (inverse) demand function is: P = 84 - 2^.Q where P = price of output in dollars.
1.	a.	(1) Profit-maximizing output:______ (2) Price:______ (3) Profits:______ (4) MC:______ (5) ATC:______
	b.	Sketch Pimax's demand, marginal revenue, marginal cost and average total cost curves. Indicate in your diagram: (1) the efficient output level; (2) Pimax's profit-maximizing output level and profits; and (3) the welfare loss at Pimax's output level. (Note: draw MC carefully--don't just assume the usual shape for it.)

2.	Suppose you are directed by the government to regulate Pimax's prices. If your goal is economic efficiency:
	a.	(1) What price ceiling will you set? ______ (2) How much will Pimax produce? ______ (3) How large will its profits be? ______
	b.	Can you recommend a policy to eliminate the profits from part a while not interfering with Pimax's output decision under your price regulation? Explain.

(from Frank, Ch.12) What effect will the imposition of a 50 percent tax on economic profit have on a monopolist's profit-maximizing price and output levels?

4.	Consider the following information about the demand for a particular textbook (P=dollars and Q=1000s of books): P = 20 - 0.2^.Q MC = 6 + 1.68^.Q
	a.	The author collects a royalty equal to 20% of gross receipts (total revenue) on sales of the book. What quantity and price does the author prefer? (Hint: the author's goal is to maximize 20% of TR.) (1) Q=______ (2) P=______
	b.	What quantity and price does the publisher prefer? (Hint: the publisher's profits equal 80% of TR minus all of TC.) (1) Q=______ (2) P=______