ENGM9011 Assignment 3

There are three questions.

Due date: Wednesday, May 1, 11:59 pm. Submit at ENGM9011 LMS online.
There is a total of 70 marks. Marks in brackets ( )
Round your answer to two decimal places, if need be. Show your work.

1. Monopoly. A monopolist produces fidget spinners which it sells in two

markets: Home (H) and Foreign (F). The demand functions in the two
1 1
markets are 𝑄𝐻 = 90 − 𝑝𝐻 and 𝑄𝐹 = 30 − 𝑝𝐹 respectively. The
2 4
fidget spinners are all produced at one factory with total costs 𝐶 =
500 + 40𝑄 where 𝑄 = 𝑄𝐻 + 𝑄𝐹 is total output.
a. Suppose there is a law that mandates that the monopolist must
sell the fidget spinners for the same price p at Home and Foreign.
1 1
Therefore, 𝑄𝐻 = 90 − 𝑝 and 𝑄𝐹 = 30 − 𝑝.
2 4
i. What is the total market demand function 𝑄 = 𝑄𝐻 + 𝑄𝐹 ?
(2)
ii. Find the monopolist’s profit-maximizing output and price
(6)
b. Thanks to lobbying, the law is repealed. The monopolist is able to
charge different prices (pH and pF) in the two markets, so the
1 1
demand functions are 𝑄𝐻 = 90 − 𝑝𝐻 and 𝑄𝐹 = 30 − 𝑝𝐹 .
2 4
i. Find the monopolist’s profit-maximizing output and price in
each market: Home and Foreign. (8)
ii. Show that the market that the monopolist charges a higher
price to the relatively inelastic demand market (lower
absolute elasticity of demand). Note: Calculate the elasticity
of demand for a market at the equilibrium point for that
market. (4)
c. Show that it is more profitable for the monopolist to charge
different prices in the two markets rather than one price in both
markets. (4)

ENGM9011 Assignment 3
 2. Externalities. Suppose the (inverse) market demand for solar panels is
𝑝 = 1500 − 20𝑄 and the (inverse) market supply is 𝑝 = 10𝑄
a. Find the competitive market equilibrium price and quantity. (4)

Each solar panel sold reduces pollution by 1 unit and each unit
reduction in pollution is valued at $300 by society.
b. What is the optimal quantity of solar panels for society? (4)
c. What is the deadweight loss to society of the competitive
equilibrium outcome? (4)
d. The government wants to eliminate the externality by providing a
subsidy of s dollars per unit of solar panels sold. How much should
the per unit subsidy s be to eliminate the externality? (2)
e. What is the new equilibrium price to consumers? What is the new
equilibrium price to producers? (4)
f. Find the gains or losses to (10)
i. Consumers of solar panels (change in CS)
ii. Producers of solar panels (change in PS)
iii. Government (change in government revenues)
iv. Nation as a whole – consumers, producers, government,
and all the other members of society.

ENGM9011 Assignment 3
 3. Return and Present Value
a. Suppose you pay $810 today for an asset that will return $1,000
three years from today. What is your simple annual return? What
is your effective annual return? (6)

b. Suppose a large capital project will take five years to build. After
five years, it will generate revenues of $1 million per year for
twenty years*, after which the capital is sold for scrap value of $5
million. The company’s required rate of return is 15% per annum.
What is the present value to the company of the revenues of the
capital project (to two decimal places)? *Note: since revenues are
assumed to be received at the end of the period (by default),
twenty years means at the end of 19 years. (6)

c. Suppose a firm announces an annual profit today of $100. You are

thinking of buying shares in the company. You believe the
company profits will grow 8% per annum forever. Your required
return (yield) is 12% per annum.
i. Find your valuation of the company’s profits in present
value terms. (4)
ii. Suppose there are 1,000 shares in the company. How much
would you be willing to pay for a share? (2)

ENGM9011 Assignment 3