ABC is an airline with has a monopoly over all the travel lines it covers. The monopolist faces the market demand: D(p)=100-p, and its total costs C(q)=20q. The firm chooses prices to maximize profits. Answer the following questions: a. Write down the firm’s problem b. Find the optimal price. c. Calculate the firm’s profits, the Lerner’s index, the elasticity of demand, the consumer surplus and the deadweight loss. d. Assume a software firm has commercialized a new programme that allows a more efficient organization of the flights, routes, tickets, etc. The firm charges F dollars for the programme. The airline has calculated that with this new system in place, it could lower marginal costs down to C’(q)=10. Will the airline buy this new programme? (Hint: solve again a) to c) with this new information and compare the answers)
11. Ford produces cars and is a monopolist in its market. The demand function is: D(p)=30-p, where p is the price. The cost function is equal to: C(q)=10+10q, where q is the quantity. The objective of Ford is to maximize benefits. Answer the following questions. a. Write down the firm’s problem b. Calculate the optimal price c. Calculate the quantity produced, profits, revenue, total costs, demand elasticity, consumers’ surplus and deadweight loss of efficiency. d. Assume that Ford needs to buy a permit, with price F, to be able to produce. Answer again questions a) to c), and compare the answers.