Problem Set 4
Intermediate Microeconomic Theory
Answer all 2 questions. In order to get full credit you must show all of your work. If questions have multiple parts
please clearly label which part of the question you are answering. You will be awarded 2 Extra Credit Points if
you complete the assignment on this document.
1. (25 points) Market Power and Monopoly: Suppose that a monopolistic seller of designer handbags faces
the following inverse demand curve: P = 50?0.4Q. The seller can produce handbags for a total cost of T C = 10Q.
(a) Calculate the profit-maximizing price for this seller.
(b) Suppose the government levies a $4 tax per unit on sellers of handbags. What is the firmànew total cost
function? Calculate how this tax will a?ect the price the monopolist charges its customers.
(c) Who bears the burden of this tax?
2. (25 points) Pricing Strategies for Firms with Market Power: Rich Uncle Pennybags is the only seller of
board games in Atlantic City, New Jersey. The inverse demand curve for board games is given by P = 40 ? 0.5Q,
where Q is in hundreds of games per month. Rich Uncle Pennybags total cost of producing board games is
T C = 7Q + 0.05Q2 + 100.
(a) If Rich Uncle Pennybags cannot price discriminate, what is his profit-maximizing level of output? What is his
profit-maximizing price?
(b) How much consumer surplus will buyers of board games receive? How much producer surplus will end up in
Uncle Pennybags pockets? How much deadweight loss is created by the board game monopoly? Graphing will
help you answer this question.
(c) Suppose Uncle Pennybags is a magnificent salesman, able to discern perfectly his customers willingness to pay.
If he leverages this information to begin perfectly price discriminating, how many board games will he sell?
(d) How much surplus will buyers receive from a perfectly price discriminating Uncle Pennybags? How much
producer surplus will Uncle Pennybags capture? What will the deadweight loss due to monopoly be?

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