A monopolist faces a demand curve Q = 120 - 2p and has costs given by C(Q) = 20Q + 100
a. Write the monopolist's profits in terms of the price it charges.
b. Use the derivative (w.r.t. price) to determine the monopolist's profit-maximizing price.
c. Now, derive the monopolist's inverse demand based on the demand equation above. Write out the monopolist's profits in terms of quantity.
d. Use the derivative w.r.t. Q to determine the monopolist's optimal quantity. What price does the monopoly charge?
a. (p) = (120 - 2p)p - 20(120 - 2p) - 100
b. d/dp = 120 - 4p + 40 = 0 p* = 40
c. p = 60 - .5Q
Pi(Q) = (60 - .5Q)Q - 20Q - 100
d. dPi/dQ = 60 - Q - 20 = 0 Q = 40 and p = 120 - 2(40 ) = 40. The answer is the same whether deriving the optimality condition based on price or quantity.
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Suppose the Fed cares only about keeping the economy close to full-employment output
The Fed can target the real money supply (thus keeping the LM curve fixed) or it can target the real interest rate, changing the money supply and shifting the LM curve however is necessary to prevent a change in the real interest rate. (a) Which is the best policy if the main shocks to the economy are shocks to the IS curve? Explain why. Illustrate with a diagram. (b) Which is the best policy if the main shocks to the economy are shocks to real money demand? Explain why. Illustrate with a diagram.
Reserve deposits are
A) assets for financial institutions, but liabilities for the Fed. B) liabilities for financial institutions, but assets for the Fed. C) assets for both financial institutions and the Fed. D) liabilities for both financial institutions and the Fed.