Assume that a firm operates in an industry where it has all the market power and it faces a constant marginal cost of 40. The firm’s market demand is Q= 400 −4P.
(3 pts) Define producer and consumer surplus, calculate their value in this case, and note their locations
in your figure. [No more than 5 sentences]
(d) (3 pts) Is there a deadweight loss? If so, why? And how large is it? [No more than 5 sentences]
(e) (3 pts) Are consumers harmed by the presence of market power? Explain using the example of this
problem. [No more than 5 sentences]
(f) (3 pts) Now assume that you are the policymaker and you want to "fix" this market. What kinds of
policies can be used to increase competition? [No more than 5 sentences]
(g) (3 pts) Using your answer to part (f), what would be the best possible outcome of this policy on the
economy? [No more than 5 sentences]
(h) (3 pts) Using your answer part (g), what would happen to the deadweight loss, producer surplus, and
consumer surplus? Why?
