## (Solution Download) 1 Consumer Compensation Consider the story of Coca Cola and th

1. Consumer Compensation. Consider the story of Coca-Cola and the scoreboard in the chapter. Your job is to fully compensate each student for the cost associated with the soft-drink monopoly. Suppose Coca- Cola increased the price of soft drinks by \$0.20 per can and each student consumed 10 soft drinks before the monopoly was granted.
a. Kate continues to buy 10 soft drinks at the higher price. What is the appropriate compensation for her?
b. Elise buys only 4 soft drinks at the higher price. Her demand curve is linear. What is her appropriate compensation? Draw a graph that shows her change in consumer surplus.
2. Pricing with Zero Marginal Cost. Consider a natural spring that produces water with a unique taste. The monopolist who owns the spring has a fixed cost of installing plumbing to tap the water but no marginal cost. The demand curve for the spring water is linear. Draw a graph to show the monopolist s choice of a price and quantity. At the profit-maximizing quantity, what is the price elasticity of demand? If the spring were owned by a government that applied the marginal principle, what price would it charge?
3. Rules of Monopoly. In the board game Monopoly, a player who gets the third deed for a group of properties (for example, the third of three orange properties) doubles the rent charged to all other players who land on any property in the group. Similarly a player who has a single railroad charges a rent of \$25, while a player who has all four railroads charges a rent of \$200 for each railroad.
a. Are these pricing rules consistent with the analysis of monopoly in this chapter?
b. In the game, is there a deadweight loss from monopoly? Why or why not?
4. The National Park Service Monopoly. The National Park service grants a single firm the right to sell food and other goods in Yosemite National Park.
a. What are the trades-offs associated with this policy? Who gains and who loses?
b. Does your answer to part (a) depend on whether the monopoly is granted as a political favor or auctioned to the highest bidder?
5. Deadweight Loss and Demand Elasticity. Using Figure as a starting point, consider a similar product that has the same monopoly price and quantity (\$18 and 200 doses), but a more elastic demand. The long-run marginal cost is the same (\$8).
a. A more elastic demand generates a _________ (flatter/steeper) market demand curve.
b. Draw a graph like the one shown in Figure and show the deadweight loss from the monopoly on the product.
c. The deadweight loss is _________ (larger/smaller) than the loss shown in Figure because the change in_________ is _________(larger/smaller).

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Question answered on Jul 22, 2018
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