Author Question: If an industry could be organized either perfectly competitively or as monopoly, a monopoly would ... (Read 42 times)

burton19126 · **on:** Jul 1, 2018

If an industry could be organized either perfectly competitively or as monopoly, a monopoly would

A) produce less output.
B) produce where P > MC.
C) charge higher prices.
D) All of the above

Question 2

Recall that the Cobb-Douglas Utility function U(X,Y) = XaY1-a has the unusual property that the demand for each good depends only on its own price.

Therefore, a consumer will always allocate the same proportion of income to each good. Specifically, the demand for X is
X = aI/px
where I is income and px is the price of X.
a. What is the price elasticity of demand for X?
b. What is the direction of the income effect on X of an increase in px?

trog · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

D

Answer to Question 2

a. Using calculus,
X/px = -aI/px2
Then E = -1. Because a constant proportion of income is devoted to each good, an increase in price will be matched by an equal offsetting proportional decrease in quantity.
b. X is a normal good from the demand equation. Therefore, the income effect from a price increase will be to reduce consumption of X.