Study Questions II   Due Friday, February 25 in quiz section.

 

1.	Assume a per unit tax is imposed on a competitive industry. Show the short-run impacts on economic efficiency. What are the welfare impacts for consumers, producers, and society in general?
2.	Show the winners and losers from a price ceiling set below the equilibrium price in a competitive industry. What is the relationship between the amount gained by the winners and the amount lost by the losers? (Make clear your assumption about who does and does not receive the good when there is excess demand.)
3.	The long-run supply curve in a competitive industry is the summation of all the firms’ marginal cost curves  above long-run average cost. Agree or disagree and explain.
4.	Why is a competitive firm’s demand curve horizontal when industry demand is downward sloping?
5.	A company has the following cost curve:   TC = 3,000,000 + 0.001 Q2 The firm operates in a competitive market where it can sell as much output as it desires at $10 per unit. What is the profit maximizing quantity? What is the firm’s profit or loss? In the short run, will the firm operate or shut down? What would be a break-price for the firm? What is the firm’s supply curve?
6.	In a competitive market, the following supply and demand equations are given: Supply: P = 5 + 0.36Q   and  Demand: P = 100 – 0.04Q Determine the equilibrium price and quantity. Determine the consumer and producer surpluses. Determine the deadwight loss that would result if the government were to impose a price ceiling of $40.
7.	Suppose there are 200 firms, who behave as if in a perfectly competitive industry. They are identical, with cost function:  TC = 50Q+5Q2 The Demand in their industry is  Q = 1000-5P Find each firm’s supply function, and then the market supply function. Use this to find the competitive price, and find what quantity each firm will produce.
8.	Complete the Table below:

Quantity	Fixed Cost	Variable Cost	Total Cost	AFC	AVC	ATC	MC
5		220		24			XXX
6			408
7					52
8				15		71
9			664
10		655

 

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Study Questions III—Due Friday, April 1

 

1.         In short-run equilibrium, a monopolistic competitive firm resembles a monopoly.  In long-run equilibrium, it has many (but not all) of the characteristics of a competitive firm.  Explain.

 

2.         Why are profits difficult to protect in monopolistic competition?

 

3.         Assume that a monopolist has no costs of production and faces a demand curve given by           Q = 150 - P.

            a.         What is the profit maximizing price-quantity combination for the monopolist and its profit?

            b.         If a second firm (also with no costs) enters the market with an identical product, the market demand is given by q1 + q2 = 150 - P.  If both firms behave as Cournot duopolists, find the profit maximizing price-quantity combination and profit for each firm.

            c.         If firm 1 behaves as a Stackelberg duopolist and firm 2 continues with Cournot behavior, find the profit maximizing price-quantity combination and profit for each firm.

            d.         Examine the welfare (efficiency) impacts of each situation.

 

4.         Firms in a competitive industry can generally increase their profits by forming a cartel.  However, cartel members (who benefit from the cartel) have an incentive to chisel (cheat) on their fellow cartel members.  Explain. 

 

5.         Why are cartels likely to be unstable arrangements?

 

6.         What are the strengths and weaknesses of the kinked demand curve analysis of oligopoly?

 

7.         Some experts have argued that too many brands of breakfast cereal are on the market.  Give an argument to support this view.  Give an argument against it.

 

8.         Show an equilibrium in which a dominant oligopolist sets the price, but allows the other firms in the industry to choose their profit maximizing outputs.  Why does price leadership evolve in some oligopolistic markets?

 

9.         Under what conditions for a monopolist would the maximization of total revenue result in the maximization of profit?

 

10.         Explain why marginal revenue is less than price for a monopolist.

 

11.         Effective government regulation of a monopoly can insure economic efficiency and zero economic profit in the industry. Agree or disagree and explain

 

12.         Show a situation where a monopolistic industry would cease to exist in long-run equilibrium

 

13.         Can price discrimination ever increase economic efficiency?

 

14.                 The major efficiency problem connected with monopoly is the existence of economic profits in the long run.  Agree or disagree and explain.

 

15.                 The industry demand curve:  Q = 1800 - 200P

The industry exhibits constant long run average cost at all levels of output, regardless of the market structure.  Long run average cost is constant at $1.50 per unit of output.  Calculate market output, price, consumer surplus and producer surplus for each of the following situations:

a.                   Perfect competition.

b.                  Monopoly

c.                   Monopoly practicing first degree price discrimination

 

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 Study Questions IV—Due Friday, April 8

 

 

1. Show the equivalence of the condition for profit maximization in the output market: Marginal Cost = Marginal Revenue and the condition for profit maximization in the input market: Marginal Revenue Product = Wage.

2. Derive the demand curve of labor from the production function below. Assume the firm operates in competitive input and output markets and the price of its output sells for $8 per unit. What is the profit maximizing level of hiring if the wage rate is $40?
How would the demand curve change if the price of the firm’s output increased to $11 per unit? What would be the new hiring level at the $40 wage rate?

 

Labor Total Product
1         12
2         22
3         30
4         36
5         40
6         42

3. Explain the derivation of the market demand curve for labor. Why is it not just the summation of the marginal revenue product curves of each of the firms in the industry?

4. Analyze the welfare impacts of a minimum wage law set above the equilibrium wage in a competitive market. Show the gains and losses of the various groups.

5. Analyze the welfare impacts of a minimum wage law set above the equilibrium wage in a monopsonistic labor market. Show the gains and losses of the various groups.

6. An individual has the following utility function:
U = f(Income, Leisure) = Income x Leisure
where (Work + Leisure = 16) and Income = wage x Work.
Find the utility maximizing level of work, leisure and income if the wage rate is $10. (Hint: Put all variables in terms of Work and solve.)
Derive a supply curve of labor.

7. Assume a firm is a monopsonist facing the supply curve of labor given below.
Derive the marginal cost of the input (marginal resource cost). Why is the marginal cost of the input greater than the wage rate?

Wage     Labor
30         0
40         1
50         2
60         3
70         4
80         5


8. Consider points A, B, C, and D shown in the accompanying Edgeworth box diagram below.
a. Which of these points do Bart and Lisa both prefer to the endowment point O?
b. Which of these points are Pareto optimal? Are other Pareto optimal points that both persons would not prefer to point 0?
c. Which of these points are competitive equilibria? Justify your answers.
d. Briefly explain the concept of "gains from trade" using this diagram.


 

9. Person A has the following utility function: U^A = X^A + Y^A .
Person B has the following utility function: U^B = X^BY^B .
The supplies of the two good are fixed:
X^A + X^B = 200 and Y^A + Y^B = 100.
a. Find a Pareto optimal distribution of the two goods.
b. Derive the contract curve.

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Study Questions V.

 

            b.     If bargaining is not possible between the two persons and A has the right to choose the level of the externality, devise a tax that would yield optimality.

            c.         What would happen if bargaining became possible between A and B before the tax is imposed?  After the tax is imposed?                                                

                                

Level of Externality	Marginal Benefit to A	Marginal Damage to B
0
1	$22	$4
2	18	8
3	14	12
4	10	16
5	6	20
6	2	24

 

 

7.  Page 638, #1 and #3.

 

8.  Page 184, Questions for review: #5     Page 185 #6.

 

9.  Page 511, Exercises #3 and #7.