2. The reason these firms' shares are valuable is that once their products have established a market niche, they will rise in value. The anticipated future profits of such companies lead investors to bid for their shares now.

6. If the import licenses were free and could not be transferred, owners of each license would make an economic profit of $20,000 per year. When the annual interest rate is 10%, the most a buyer will be willing to pay for a stream of economic profits of $20,000 is the amount of money she would have to put into a saving account to earn that much interest each year. This sum of money is $200,000. If the import licenses were auctioned, they would sell for this price, and the government would earn an economic rent of $200,000 per license. In this situation, the buyers of the licenses would make no economic profit. If the government chose to sell the license for less, buyers would be able to make some economic profit.

Chapter 9

2

a. False. The industry demand curve is downward sloping in both cases, but from the individual perfectly competitive firm's point of view, the demand curve is horizontal. Because the individual firm is too small to affect the market price, it can sell as many units as it wishes at that price.

b. True. If they try to charge a higher price they will lose all their business; if they try to charge a lower price, they will not be maximizing profit.

c. True, this is the essential feature of natural monopoly.

3. The answer is c. The monopolist chooses the output level at which marginal revenue equals marginal cost and then charges a price consistent with demand at that level of output. Since price always exceeds marginal revenue, price is greater than marginal cost. There is no shortage: at the output chosen, demand and supply coincide. And the monopolist has no reason to maximize marginal revenue (which would require producing zero units of output).

9. 

a and b: The demand curve should intersect the vertical axis at 80 and the horizontal axis at 160.
The marginal revenue curve should intersect the vertical axis at 80 and the  horizontal axis at 80.
The marginal cost curve is a ray from the origin with a slope of 1.

c. MR=80-Q. You know this because the demand curve is given : P=80-Q/2.
Take that equation and multiply the slope by 2. That gives you the equation for the corresponding marginal revenue curve. The slope, remember, is the coefficient on the Q, which in this case is -1/2.

d. Profit=total revenue minus cost
Total revenue is P times Q at the profit maximizing point or 40(60)=2,400.
Total costs are fixed costs plus the sum of all the marginal costs, or 400 plus 820, or 1220. So profits=1180.

Alternatively you can use calculus, integrate the marginal cost equation. If MC=Q then TC = (1/2) [Q squared] plus some constant of integration (in this case, the fixed costs).
The profit maximizing Q is 40.
Using this method, total costs equal 1200, and profits 1200.

Either approach is OK.

e. Consumer surplus is the area of the triangle formed by the horizontal line at the equilibrium price of 60 and the demand curve. The area of a triangle is 2 (base) (height), or 2 (40)(20) or 400.