08 Jun Question Econ 444-02 (Corporate Economics), Fall 2015
Question
Econ 444-02 (Corporate Economics), Fall 2015
Problem Set #1
Due in class Thursday, September 10
Problem 1. Suppose that, in a large city, 200 identical street vendors compete in a
competitive market for hot dogs.
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1. Fore each vendor i, total costs to produce qi hot dogs is, Ci (qi ) = 1 qi + 1 qi .
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What is the marginal cost function of each firm?
2. Given your answer from above, how many hot dogs will each vendor produce if
offered a price of $4 per hot dog?
3. What is the aggregate supply curve for this market?
4. Let demand for hot dogs be Q = 2500−100P , what is the short run equilibrium
price?
5. What is the total quantity of hot dogs sold in short-run equilibrium?
6. In the long run, would you expect this industry to experience entry or exit?
Explain your answer.
Problem 2. In the same city as before, a new “wave” technology is discovered, firms
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using this new technology have a total cost function Ci (qi ) = 2qi + 1 qi . While the 200
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existing firms keep their old technology. Ten new firms enter using “wave” technology.
The hot dogs produced by the two technologies are exactly the same (that is, the hot
dogs are homogeneous). You may assume there is free entry in both technologies in
the long run.
1. The promoters of “wave” technology point out that although it may appear more
expensive at first, it benefits from greater “economies of scale” than standard
technology. Explain what they mean, feel free to use a numerical example.
Econ 444: Problem Set #1
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