02 Jun Question ARE 100B Summer 2014 M. Whitney HOMEWORK 1 (part a)
Question
ARE 100B
Summer 2014
M. Whitney
HOMEWORK 1 (part a)
Due in class August 20th
(Note: You make want to make a copy of your answers to study from)
1. (20 pts.) Suppose that demand for a particular style of handmade Rwandan baskets is Qd =
1700 – 10P. Each basket maker has the following cost function: TCi = 1000 + 50 qi + .1 qi^2.
Given this information, find the market outcomes under the various market structures below.
a. (4) Perfect competition, short-run. Assume that at present, there are 8 basket makers, each
operating as a separate, competitive firm.
Solve for market price, quantity per firm, market quantity, and profit or loss per firm.
Also find marginal cost and average total cost for each firm. Is this market in long-run
equilibrium? How can you tell? What do you expect to happen over the longer run?
b. (4) Perfect competition, long-run. Given the same cost functions above, find the long-run
equilibrium quantity per firm, the LR market price, market quantity and equilibrium number of
firms. What is the profit or loss per firm? What is MCi and ATCi?
c.(4) Multiplant monopoly. Suppose that a local entrepreneur decides to form a single monopoly
by acquiring all the firms from part b and operating them as a single company (Each basket
maker will still produce using the same cost function, but all the output will be marketed
centrally). Now, how much output is produced at each plant (that is, by each basket maker), and
how much by the firm as a whole? What is the monopoly price? What is the monopolist’s profit
or loss per plant? What is the firm’s overall profit or loss for all 10 plants together? What is
MCi and ATCi? What is MR?
d. (4) Graph the market supply and demand functions from part b (long-run perfect competition.)
( Hint: recall that the market supply function is N*qis). Label Pc and Qc. Then find consumer
surpus (CS), producer surplus (PS) and total social welfare (TSW) under this market structure.
e. (4) Now, graph market demand, and the monopolist’s industry marginal cost and marginal
revenue functions, for the situation in part c. (graph the monopolized market ) Show Pm, Qm
and MR=MC. Then solve for CS, PS, and TSW. How much did consumer surplus change due
to monopoly? How much did producer surplus change? What was the deadweight loss of
monopoly?
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