You are on page 1of 58

# ECO 3104 - Examples

This Version: September 26, 2013

1

Supply and Demand
Problem 1:
The demand for books is: QD = 120 − P
The supply of books is: QS = 5P

(a) What is the equilibrium price of books?
(b) What is the equilibrium quantity of books sold?
(c) If P = \$15, do we observe a shortage or excess supply? How big is it?
(d) If P = \$25, do we observe a shortage or excess supply? How big is it?
Problem 2:
The inverse demand curve for product X is given by:
PX = 25 − 0.005Q + 0.15PY ,
where PX represents price in dollars per unit, Q represents rate of sales in
pounds per week, and PY represents selling price of another product Y in
dollars per unit. The inverse supply curve of product X is given by:
PX = 5 + 0.004Q.
Determine the equilibrium price and sales of X when the price of product Y
is PY = \$10.
Problem 3:
The daily demand for hotel rooms on Manhattan Island in New York is given
by the equation
QD = 250, 000 − 375P.
The daily supply of hotel rooms on Manhattan Island is given by the equation
QS = 15, 000 + 212.5P.
2

What is the equilibrium price and quantity of hotel rooms on Manhattan
Island?
Problem 4:
For U.S. consumers, the income elasticity of demand for fruit juice is 1.1. The
economy enters a recession and consumer income declines by 2.5%. What is
the expected percentage change in the quantity of fruit juice demanded?
Problem 5:
The cross-price elasticity of demand for peanut butter with respect to the
price of jelly is -0.3. The price of jelly declines by 15%.What is the expected
percentage change in the quantity demanded for peanut butter?
Problem 6:
Harding Enterprises has developed a new product called the Gillooly Shillelagh. The market demand for this product is given as follows:
Q = 240 − 4P
(a) At what price is the price elasticity of demand equal to zero?
(b) At what price is demand infinitely elastic?
(c) At what price is the price elasticity of demand equal to minus one?
(d) If the shillelagh is priced at \$40, what is the point price elasticity of
demand?
Problem 7:
The demand for a bushel of wheat in 1981 was given by the equation
QD = 3550 − 266P.
(a) What is the price elasticity of demand at a price of \$3.46?
(b) If the price of wheat falls to \$3.27 per bushel, what happens to the
revenue generated from the sale of wheat?
3

Consumer Behavior
Problem 8:
Consider Gary’s utility function: U (X, Y ) = 5XY , where X and Y are two
goods.
(a) If Gary consumed 10 units of X and received 250 units of utility, how
many units of Y must he have consumed?
(b) Would a market basket of X = 15 and Y = 3 be preferred to the above
combination?
Problem 9:
A consumer has \$100 per day to spend on product A, which has a unit price
of \$7, and product B, which has a unit price of \$15. What is the slope of the
budget line if good A is on the horizontal axis and good B is on the vertical
axis?
Problem 10:
If the quantity of good A (QA ) is plotted along the horizontal axis, the
quantity of good B (QB ) is plotted along the vertical axis, the price of good
A is PA , the price of good B is PB and the consumer’s income is I, then the
.
slope of the consumer’s budget constraint is
Problem 11:
The budget constraint for a consumer who only buys apples (A) and bananas
(B) is PA A + PB B = I where consumer income is I, the price of apples is
PA , and the price of bananas is PB . To plot this budget constraint in a figure
with apples on the horizontal axis, we should use a budget line represented
by which equation?

4

Problem 12:
Sally consumes two goods, X and Y . Her utility function is given by the
expression U = 3XY 2 . The current market price for X is \$10, while the
market price for Y is \$5. Sally’s current income is \$500.
(a) Write the expression for Sally’s budget constraint.
(b) Determine the X, Y combination which maximizes Sally’s utility, given
her budget constraint.
(c) Calculate the impact on Sally’s optimum market basket of an increase
in the price of X to \$15. What would happen to her utility as a result
of the price increase?
Problem 13:
Jane lives in a dormitory that offers soft drinks and chips for sale in vending
machines. Her utility function is U = 3SC (where S is the number of soft
drinks per week and C the number of bags of chips per week), so her marginal
utility of S is 3C and her marginal utility of C is 3S. Soft drinks are priced
at \$0.50 each, chips \$0.25 per bag.
(a) Write an expression for Jane’s marginal rate of substitution between soft
drinks and chips.
(b) Use the expression generated in part (a) to determine Jane’s optimal mix
of soft drinks and chips.
(c) If Jane has \$5.00 per week to spend on chips and soft drinks, how many
of each should she purchase per week?
Problem 14:
An individual consumes products X and Y and spends \$25 per time period.
The prices of the two goods are \$3 per unit for X and \$2 per unit for Y . The
consumer in this case has a utility function expressed as:
U (X, Y ) = 0.5XY
5

Janice has a utility function given by the expression: U = 4X 0. (b) Determine the amount of consumption of X and Y that will maximize utility. X and Y . X and Y . The price of X is \$9. (b) What is the optimal mix between X and Y in John’s market basket? 6 . and the price of Y is \$12. respectively. Problem 16: John consumes two goods. Problem 15: Janice Doe consumes two goods. Janice currently has an income of 750 per time period. how much Y will Janice consume? (e) Calculate the impact of the ration restriction on Janice’s utility.5 . (d) Suppose that the government rations purchases of good X such that Janice is limited to 10 units of X per time period. The marginal utility of X and the marginal utility of Y satisfy the following equations: M UX = Y and M UY = X.5 Y 0. (a) Calculate the Marginal Utility of X and Y (b) Write an expression for Janice’s budget constraint. (c) Calculate the optimal quantities of X and Y that Janice should choose. (c) Determine the total utility that will be generated from the consumption bundle you calculated in part (b). (a) Write an expression for John’s MRS. Assuming that Janice chooses to spend her entire income. The current prices of X and Y are 25 and 50.(a) Express the budget equation mathematically. given her budget constraint.

how many colas and tickets should Natasha buy to maximize utility? (d) Is Natasha better off with or without the constraint? 7 .1 (a) Calculate the marginal utility of cola (M Uc ) and the marginal utility of rock concerts (M Ur ) (b) If the price of cola (Pc ) is \$1 and the price of concert tickets (Pr ) is \$30 and Natasha’s income is \$300.(c) John is currently consuming 15 X and 10 Y per time period. how many colas and tickets should Natasha buy to maximize utility? (c) Suppose that the promoters of rock concerts require each fan to buy 4 tickets or none at all.9 r0. r) = c0. Under this constraint and given the above prices and income. Is he consuming an optimal mix of X and Y ? Problem 17: Natasha derives utility from attending rock concerts (r) and from drinking colas (c) as follows: U (c.

(a) What is Donald’s budget line? (b) What is the optimal ratio of Qc and Qd ? (c) What quantities of Qc and Qd will maximize Donald’s utility? (d) Holding Donald’s income and Pd constant at \$120 and \$1 respectively. 8 . His utility function is as follows: U (Qc . the prices of the products and quantities consumed are: PA = \$10. Initially. PB = \$10. PB = \$5. After a reduction in price of B. what is Donald’s demand curve for carrots? (e) Suppose that a tax of \$1 per unit is levied on donuts. QB = 7.5. QA = 2. both of which are purchased by Madame X. Qd ) = Qc Qd The marginal utility that Donald receives from carrots (M Uc ) and donuts (M Ud ) are given as follows: M Uc = Qd and M Ud = Qc Donald has an income (I) of \$120 and the price of carrots (Pc ) and donuts (Pd ) are both \$1. QA = 3. Madame X has \$100 to spend per time period. the prices and quantities consumed are: PA = \$10. carrots (Qc ) and donuts (Qd ). How will this alter Donald’s utility maximizing market basket of goods? Problem 19: The following data pertain to products A and B. QB = 15.Individual and Market Demand Problem 18: Donald derives utility from only two goods.

inferior. she would consume this combination of A and B: QA = 1.Assume that Madame X maximizes utility under both price conditions above.25P and the quarterly demand by an average woman is: QW d = 4 − 0.5. The marketing department tells them that the quarterly demand by an average man is: QM d = 3 − 0. note that if after the price reduction enough income were taken away from Madame X to put her back on the original indifference curve.000 men and 10. Problem 20: A local retailer has decided to carry a well-known brand of shampoo. The market demand for this product is given as follows: Q = 240 − 4P (a) If the shillelagh is priced at \$40. or Giffen good.5P The market consists of 10. The demand curve for red herring is: Q = 120 − P . What is the price of red herring? Problem 22: Harding Enterprises has developed a new product called the Gillooly shillelagh. QB = 9 (a) Determine the change in consumption rate of good B due to (1) the substitution effect and (2) the income effect. Explain. (b) Determine if product B is a normal. what is the price elasticity of demand? Is demand elastic or inelastic? 9 .000 women. Also. How may bottles of shampoo can they expect to sell if they charge \$6 per bottle? Problem 21: The price elasticity of demand for red herring is -4.

in pounds per day. Problem 25: Suppose that the demand for artichokes (Qa ) is given as: Qa = 120 − 4P 10 . Problem 24: The total world demand for power transmission wire is made up of both domestic and foreign demands.00 per pound.00 per pound. in dollars per pound. Check to see if the sum of Qd and Qf equals Q. (a) Determine the total world demand for power transmission wire. and Qd and Qf are in pounds per day.(b) If the shillelagh price is increased slightly from \$40. 500P. what will happen to the total expenditure on the Gillooly shillelagh? Problem 23: The demand for telephone wire can be expressed as: Q = 6000 − 1.005Qd Foreign demand:Pf = 3 − 0. where Q represents units. (b) Determine the prices at which domestic and foreign buyers would enter the market. (d) Determine total quantity sold at P = \$4. and P represents price. (c) Determine the domestic and foreign quantities at P = \$2. where Pd and Pf are in dollars per pound.50 per pound.00075Qf . which are given as: Domestic demand:Pd = 5 − 0. Thus. Determine the price elasticity of demand at P = \$2. the total demand is the sum of the two sub-demands.

000 10 where I is Ronald’s monthly income. 5. 000.25 per bushel and agrees to buy any resulting excess supply. Suppose the price of Cap Rock Chardonnay is \$10. 000P . 500. 000 + 2. where QD and QS are quantity demanded and quantity supplied measured in bushels.000. 11 . 000P. and P = price per bushel. (a) How much does Ronald change his Chardonnay consumption if his taxes are increased by 20%. Ronald’s monthly income is \$15. (b) Assume that the government has imposed a price floor at \$2. (b) Calculate Ronald’s Consumer Surplus from consuming Cap Rock Chardonnay before and after the increase in taxes. and his tax expense is \$5. and the market supply and demand curves are given by the following equations: QD = 20. and QS = 7. How many bushels of wheat will the government be forced to buy? Determine consumer surplus with the price floor. 000.(a) What is the price elasticity of demand if the price of artichokes is \$10? (b) Suppose that the price of artichokes increases to \$12. 000.000. 000 − 4. T is his tax expense and P is the price of Cap Rock Chardonnay. Problem 27: The wheat market is perfectly competitive. (a) Determine consumer surplus at the equilibrium price and quantity. What will happen to the number of artichokes sold and the total expenditure by consumers on artichokes? (c) At what price if any is the demand for artichokes infinitely elastic? Problem 26: Ronald’s monthly demand for Cap Rock Chardonnay is given by Q=6+ 1 1 (I − T ) − P.

(a) Derive the total market demand curve for rubber erasers. 000 − 250P . 000 − 2000P . This demand is given by qO = 25. (b) Find the equilibrium market price and quantity. This demand is given by qA = 17. The first component is the demand for rubber erasers by art students. 000P . The second component is the demand for rubber erasers by all others. (c) Determine the consumer surplus for each component of demand. 12 . 000+2.Problem 28: The market supply curve of rubber erasers is given by QS = 35. The demand for rubber erasers can be segmented into two components.

4 .6 K 0. Acme has estimated this production function for its egg carton division: Q = 25L0. and L is the number of employees hired per hour (labor). What is the average product of labor? Problem 30: The total cost (TC) of producing computer software dvds (Q) is given as: T C = 200 + 5Q. Problem 32: Acme Container Corporation produces egg cartons that are sold to egg distributors.Production and the Cost of Production Problem 29: Joe owns a coffee house and produces coffee drinks under the production function q = 5KL where q is the number of cups generated per hour. 13 . K is the number of coffee machines (capital). (a) Write an expression for each of the following cost concepts: (i) Total Fixed Cost (ii) Average Fixed Cost (iii) Total Variable Cost (iv) Average Variable Cost (v) Marginal Cost (b) Determine the quantity that minimizes average total cost. What is the marginal cost? Problem 31: A firm’s total cost function is given by the equation: T C = 4000 + 5Q + 10Q2 .

The firm’s personnel manager indicates that the wage may rise to \$22.000 budget? Calculate the firm’s output. The marginal products of labor and capital are: M PL = 300L−0. given the \$500. and K = capital measured in machine hours. Analyze the effect of the higher union wage on the optimal capital-labor ratio and the firm’s employment of capital and labor.2 Davy’s employees are relatively highly skilled and earn \$15 per hour. What will happen to the firm’s output? 14 . K = capital measured in machine hours. (c) Davy is currently negotiating with a newly organized union. given the information above. where Q = annual output measured in pounds. Davy’s engineers estimate the production function represented below as relevant for their long-run capitallabor decisions. (b) How much capital and labor should the firm employ.50 under the proposed union contract. (a) Determine the firm’s optimal capital-labor ratio.8 .6 K 0.8 . L =labor measured in person hours. The firm estimates a rental charge of \$50 per hour on capital.000 per year. Davy forecasts annual costs of \$500. Problem 33: Davy Metal Company produces brass fittings.4 K 0. Q = 500L0. measured in real dollars.where Q = output measured in one thousand carton lots. Acme currently pays a wage of \$10 per hour and considers the relevant rental price for capital to be \$25 per hour. Determine the optimal capital-labor ratio that Acme should use in the egg carton division. L = labor measured in person hours. and M PK = 400L0.6 K −0.

The marginal products of labor and capital are as follows: M PL = (0. K denotes capital input (units per hour). Equipment needed for this operation can be rented at \$52 per hour. The marginal products of capital and waste generation are given as follows: M PK = 6W . Without regulation. and W = gallons of polluted water dumped into the river per year. it costs the firm \$7.25)K −0.75 (a) Construct the isocost equation.75)(0. (b) Determine the appropriate input mix to get the greatest output for an outlay of \$150. K = machine hours of capital.50 per gallon dumped.000 for the initial run of memo pads. The firm estimates its production function to be: Q = 6KW. The firm estimates a \$30 per hour rental rate on capital. Also. The production function using available technology can be expressed as: Q = 0. compute the level of output.75 L0. 15 . and L denotes labor input (units of worker time per hour). and labor can be hired at \$12 per worker hour. and M PK = (0. The company has allocated \$150.25)K 0.25 L0. where Q = annual paper production measured in pounds.000 for a production run of memo pads.Problem 34: The Longheel Press produces memo pads in its local shop.25)(0. The operating budget for capital and waste water is \$300. and M PW = 6K The firm currently faces no environmental regulation in dumping waste into the river.75 .25 .000 per year. The company can rent its equipment and hire workers at competitive rates.25K 0. where Q represents memo pads (boxes per hour). Problem 35: A paper company dumps nondegradable waste into a river that flows by the firm’s plant.25 L−0.

how much capital and waste water should the firm employ? How much output will the firm produce? (c) The state environmental protection agency plans to impose a \$7.50 effluent fee for each gallon that is dumped.000 budget. Assuming that the firm intends to maintain its pre-fee output.(a) Determine the firm’s optimal ratio of waste water to capital. (b) Given the firm’s \$300. how much capital and waste water should the firm employ? How much will the firm pay in effluent fees? What happens to the firm’s cost as a result of the effluent fee? 16 .

The market is highly competitive. If Spacely receives \$250 for every sprocket he produces. (a) Calculate the marginal costs (b) Calculate Conigan’s profit maximizing quantity. what is his profit maximizing output level? Calculate Spacely’s profits. Conigan’s total cost curve is: T C = 3. K) = 50 q . Should Conigan operate or shut down in the shortrun? Problem 37: Spacely Sprockets’ short-run cost curve is: C(q. with boxes currently selling for \$100 per thousand. 17 .001Q2 where Q is measured in thousand box bundles per year.Profit Maximization and Competitive Supply Problem 36: Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. Currently. Spacely hires 10 robot hours per period. 000 + 0. Is the firm earning a profit? (c) Analyze Conigan’s position in terms of the shutdown condition. K where q is the number of Sprockets produced and K is the number of robot hours Spacely hires. K Suppose the market is perfectly competitive. 000. The short-run marginal cost curve is: M C(q. K) = 25q 2 + 15K.

Its total and marginal cost functions are: T C = 5 − 0. Laura’s short-run marginal cost function is: M C(q. K) = 25q 2 + rK K 2/3 where q is Laura’s output level. where T C is total cost and Q is output rate (units per time period).200. Calculate Laura’s profits. the lease rate of servers is \$15.05 + 0. (a) Find Laura’s short-run profit maximizing level of output. 240.Problem 38: Laura’s internet services has the following short-run cost curve: C(q. 18 . Laura can sell all the output she produces for \$500 per unit. 75 4 q +10. (b) If the lease rate of internet servers rise to \$20. K 2/3 Currently.05Q + 0.002Q. K is the number of servers she leases and r is the lease rate of servers. K) = 50q .001Q2 M C = −0. and since the market is perfectly competitive. 128 Homer (a) What is the marginal cost function? (b) What is his optimal output? Calculate Homer’s profit or loss. Laura leases 8 servers. how does Laura’s optimal output and profits change? Problem 39: Homer’s Boat Manufacturing cost function is: C(q) = can sell all the boats he produces for \$1. Problem 40: A competitive firm sells its product at a price of \$0.10 per unit.

Sarah’s short-run marginal cost curve is 3wq 2 M C(q.10Q + 0.10 + 0. the cost of a labor hour is \$6. 1000K 3/2 At the moment.002Q2 M C = −0. K) = . and she can sell all the output she produces at \$35 per unit.(a) Determine the output rate that maximizes profit or minimizes losses in the shortterm. w is the cost of a labor hour.50. (b) If input prices increase and cause the cost functions to become T C = 5 − 0. (b) The cost per labor hour rises to \$7. and K is the number of pretzel machines Sarah leases. Sarah leases 10 pretzel machines. what will the new equilibrium output rate be? Problem 41: Sarah’s Pretzel plant has the following short-run cost function: C(q. K) = wq 3 + 50K 1000K 3/2 where q is Sarah’s output level.004Q. what happens to Sarah’s optimal level of output and profits? 19 .85. (a) Determine Sarah’s optimal output and profits.

(b) Determine the output rate for a typical firm. The market supply is expressed as: P = 5. 000. where q is measured in bushels per year.0q + 2. (b) Calculate the profit maximizing quantity for the individual firm. 000P . where Q is the market quantity demanded. and P is the price per bushel. 000.0q 2 . Problem 43: The market for wheat consists of 500 identical firms. (a) Determine the equilibrium market output rate and price. where q is the output produced by the typical firm. (c) Determine the rate of profit (or loss) earned by the typical firm.Problem 42: The market demand for a type of carpet known as KP-7 has been estimated as: P = 40 − 0. The market demand curve for wheat is Q = 90. Calculate the firm’s short-run profit (loss) at that quantity.00002q.00001q 2 M C = 0. A typical firm in this market has a total cost function given as: C = 100 − 20.05Q.0 + 0. (a) Determine the short-run equilibrium price and quantity that would exist in the market.25Q. each with the total and marginal cost functions shown: T C = 90. again measured in bushels. 20 . 000 − 20. 000 + 0. where P is price (\$/yard) and Q is rate of sales (hundreds of yards per month).

and Q is the market output. (a) Determine the equilibrium price for tortillas. demand curve: P = 11 − . Describe the expected long-run response to the conditions described in part b. (b) Determine the profit maximizing short run equilibrium level of output for a tortilla factory.1 + . You may further assume that there are no barriers to entry or exit in the market.000002Q.0009q where q is the output for an individual firm. The market supply and demand curves for tortillas are given as follows: supply curve: P = . (c) Assuming that all of the tortilla factories are identical. how many tortilla factories are producing tortillas? 21 . Problem 44: Assume the market for tortillas is perfectly competitive.00002Q The short run marginal cost curve for a typical tortilla factory is: M C = .(c) Assume that the short-run profit or loss is representative of the current long-run prospects in this market.

22 . where P = price of a pay telephone call.The Analysis of Competitive Markets Problem 45: The utilities commission in a city is currently examining pay telephone service in the city. Problem 46: In a competitive market. and Q represents rate of sales in units per year.04Q. The staff economist at the utilities commission estimates the demand and supply curves for pay telephone service as follows: QD = 1600 − 2400P . (a) Determine the equilibrium price and quantity that will prevail without the price ceiling. the following supply and demand equations are given: Supply P = 5 + 0. and Demand P = 100 − 0. (b) Determine the deadweight loss that would result if the government were to impose a price ceiling of 40 dollars per unit. The commission has been asked to evaluate a proposal by a city council member to place a \$0. (b) Analyze the quantity that will be available with the price ceiling. and QS = 200 + 3200P.036Q. and Q = number of pay telephone calls per month. where P represents price per unit in dollars.10 price ceiling on local pay phone service. (a) Determine the equilibrium price and sales rate.

25 per unit. Are all consumers better off? Are producers better off? Problem 48: The market demand and supply functions for pork are: QD = 2. 23 .S.25? (b) How much will the government spend in total? (c) How much does producer surplus increase? Problem 49: The market demand and supply functions for milk are: QD = 58 − 30. Congress is considering legislation that would put a price floor at \$2. 000P and QS = 20. 000 − 500P and QS = 800 + 100P. 000 + 2.25 per unit. To help pork producers. 000P.2P. To help milk producers the government considers implementing a price floor of \$1. To achieve this price floor the government wants to buy enough units of pork to keep the price at \$2. (a) How many units of pork will the government be forced to buy to keep the price at \$2.Problem 47: The demand and supply functions for basic cable TV in the local market are given as: QD = 200. the U.4P and QS = 16 + 3. calculate the new levels of consumer and producer surplus.75.75 and the government will purchase all the excess units at \$1. (a) Calculate the consumer and producer surplus in this market. 000 − 4. (b) If the government implements a price ceiling of \$15 on the price of basic cable service.

00 per hour.(a) How does the price floor affect the producer surplus? Calculate the change in producer surplus.35 per hour have on the market? (c) The government is contemplating an increase in the minimum wage to \$5. (a) Calculate the equilibrium price and quantity that would exist under a free market. where Q = millions of bushels and P = price per bushel. (b) How many surplus units of milk are being produced? (c) What are the milk expenditures of the government? (d) Does the increase in producer surplus due to the price floor exceed government spending on excess milk? Problem 50: The market for semiskilled labor can be represented by the following supply and demand curves: LD = 32000 − 4000W and LS = −8000 + 6000W. Calculate the impact of the new minimum wage on the quantity of labor supplied and demanded. 24 . (b) What impact does a minimum wage of \$3. and W = the wage in dollars per hour. where L = millions of person hours per year. (d) Calculate producer surplus (laborers’ surplus) before and after the proposed change. 750 − 725P and QS = 920 + 690P. Problem 51: The supply and demand curves for corn are as follows: QD = 3.

S. As a result.000 per unit to aid domestic car manufacturers.) and foreign (F) producers. 000 − 500P QSU S = 6000 + 150P QSF = 2000 + 50P. The domestic producers have been complaining that foreign producers are dumping shoes onto the U.(a) Calculate the equilibrium price and quantity that would prevail in the free market. Problem 53: The market demand and supply functions for imported cars are: 1 QD = 800. market. (a) Currently there are no restrictions covering all-leather men’s shoes.S. 6 The legislature is considering a tariff (a tax on imported goods) equal to \$2. 000.50 per bushel support price. The demand curve and relevant supply curves for the leather shoe market are as follows: QD = 50. What are the current equilibrium values? (b) Calculate the price and quantity that would prevail if the proposed policy is enacted.S. and P = price per pair. Congress is very close to enacting a policy that would completely prohibit sales by foreign manufacturers of leather shoes in the U. market. 25 . 000 − 5P and QS = (14 + )P + 225. (b) The government has imposed a \$2. where Q = thousands of pairs of shoes per year. Problem 52: The market for all-leather men’s shoes is served by both domestic (U. How much corn will the government be forced to purchase? (c) Calculate the loss in consumer surplus that would occur under the support program.

000P. calculate producer surplus in this scenario. The country has hired you to provide the following information regarding the cigarette market and the proposed tax. 000 + 75. 000 − 25. (a) What are the equilibrium values in the current environment with no tax? (b) What price and quantity would prevail after the imposition of the tax? What portion of the tax would be borne by buyers and sellers respectively? (c) Calculate the deadweight loss from the tax. What is the revenue from the tax? Problem 55: The market demand and supply functions for cotton are: QD = 10 − 0. If they do and no tariff is implemented.04P and QS = 38P − 20. and P = price per pack. importers agree to voluntarily restrict their imports to this level.(a) What is the producer surplus if the tariff is implemented? (b) How many cars are imported? (c) Suppose that instead of a tariff. The economic advisors to the country estimate the supply and demand curves for cigarettes as: QD = 140.40 per pack tax. 000P and QS = 20. where Q = daily sales in packs of cigarettes. (a) Calculate the consumer and producer surplus. (d) Do you expect importers will be more in favor of a tariff or a voluntary quota? Problem 54: A country which does not tax cigarettes is considering the introduction of a \$0. 26 .

10 a unit is implemented. Calculate the new level of consumer and producer surplus.(b) To assist cotton farmers. suppose a subsidy of \$0. (c) Did the increase in consumer and producer surplus exceed the increased government spending necessary to finance the subsidy? 27 .

25Q2 M R = 40 − 0.Market Power: Monopoly Problem 56: Barbara is a producer in a monopoly industry. T R = 40Q − 0. Her demand curve. M C = 4 (a) How much output will Barbara produce? (b) What is the price of her product? (c) How much profit will she make? Problem 57: A monopolist faces the following demand curve. total cost curve and marginal cost curve for its product: Q = 200 − 2P .5Q. M C = 5 (a) What level of output maximizes total revenue? (b) What is the profit maximizing level of output? (c) What is the profit maximizing price? (d) How much profit does the monopolist earn? Problem 58: The marginal revenue of green ink pads is given as follows: M R = 2500 − 5Q The marginal cost of green ink pads is 5Q. total revenue curve. M R = 100 − Q T C = 5Q. T C = 4Q. marginal revenue curve and total cost curve are given as follows: Q = 160 − 4P . 28 . marginal revenue curve.

The marginal revenue curve is given as follows: M R = 100 − 2Q What is the profit maximizing price? Problem 60: A firm’s demand curve is given by P = 500 − 2Q. M R = 100 − 2Q What is the deadweight loss from monopoly power? 29 . (b) Assuming that the firm’s marginal cost is zero.(a) How many ink pads will be produced to maximize revenue? (b) How many ink pads will be produced to maximize profit? Problem 59: The marginal cost of a monopolist is constant and is \$10. The firm’s current price is \$300 and the firm sells 100 units of output per week. (a) Calculate the firm’s marginal revenue at the current price and quantity using the expression for marginal revenue that utilizes the price elasticity of demand. The demand curve and marginal revenue curves are given as follows: Q = 100 − P . is the firm maximizing profit? Problem 61: The marginal cost of a monopolist is constant and is \$10.

marginal revenue and marginal cost curve for macadamia nuts are given as follows: P = 360 − 4Q. what is the deadweight loss? 30 .Problem 62: Determine the rule-of-thumb price. when the monopolist has a marginal cost of \$25 and the price elasticity of demand is -3. has a monopoly in the macadamia nut industry. M R = 360 − 8Q. M C = 4Q (a) What level of output maximizes the sum of consumer surplus and producer surplus? (b) What is the profit maximizing level of output? (c) At the profit maximizing level of output. what is the level of consumer surplus? (d) At the profit maximizing level of output.0 Problem 63: Maui Macadamia Inc. The demand curve. what is the level of producer surplus? (e) At the profit maximizing level of output.

Gardner has discovered that an economic planner hired a year before has generated the demand. M R = 28 − 0.0008Q. Inc. Recommend a price and quantity to Mr. (c) Compare the economic efficiency implications of (a) and (b) above. Mr. Gardner considers the cost and demand functions to be reasonably valid for present conditions. a cable television carrier. and marginal cost functions given below: P = 28 − 0. Mr. Conditions change very slowly in the community so that Mr. 31 .Problem 64: John Gardner is the city planner in a medium-sized southeastern city. (a) What price and quantity would be expected if the firm is allowed to operate completely unregulated? (b) Mr. where Q = the number of cable subscribers and P = the price of basic monthly cable service. Gardner using economic theory to justify your answer. Gardner has asked you to recommend a price and quantity that would be socially efficient. Gardner knows relatively little economics and has hired you to answer the questions listed below. marginal revenue..0016Q M C = 0. The city is considering a proposal to award an exclusive contract to Clear Vision.0012Q.

0005QB (brand name) 32 . The retail price of the shirts carrying the Calloway label is \$42. The radial tires sold in both sub-markets are identical.0. Which price and output strategy will maximize profits? Problem 66: Calloway Shirt Manufacturers sells knit shirts in two sub-markets. the research suggests that both elasticities are constant over broad ranges of output. A and B. and the elasticity of demand for the Archwood shirts is -4. and the shirts are labeled with the name Archwood.00 while the Archwood shirts sell for \$25. and the marginal cost is constant at \$10 per tire for both types. Calloway’s market research indicates a price elasticity of demand for the higher priced shirt of -2.0.Pricing with Market Power Problem 65: A firm sells an identical product to two groups of consumers. The firm has decided that third-degree price discrimination is feasible and wishes to set prices that maximize profits. What price should the firm set for the Calloway label to achieve an optimal price ratio? Problem 67: American Tire and Rubber Company sells identical radial tires under the firm’s own brand name and private label tires to discount stores. The firm has estimated the following demand curves for each of the markets. P B = 70 − 0. the shirts carry Calloway’s popular label and breast logo and receive a substantial price premium. In one sub-market. The other sub-market is targeted toward more price conscious consumers who buy the shirts without a breast logo. (a) Are Calloway’s current prices optimal? (b) Management considers the \$25 price to be optimal and necessary to meet the competition. Moreover.

00 per ticket for anyone 12 years of age or older. The firm has estimated that the price elasticity of demand for tickets purchased by those 12 years of age or older is -1.50 and private label tires for a price of \$17.05QCS . PC/S = children’s/senior citizen’s price.0002QP (private label). M RC/S = 4 − 0.16QA PC/S = 4 − 0. so that the managers consider marginal cost to be zero. Problem 69: The local zoo has hired you to assist them in setting admission prices. Calculate the elasticity of demand for tickets purchased for children under 12 years of age if prices are optimal. Are these prices optimal for the firm? Problem 68: A lower east-side cinema charges \$3.6 − 0. while the other is for children and senior citizens. 33 .P P = 20 − 0.00 per ticket for children under 12 years of age and \$5. American currently sells brand name tires at a wholesale price of \$28.08QA . and QC/S = daily quantity of children and senior citizens. Crowding is not a problem at the zoo. what are the profit maximizing price and quantity in each market? Calculate total revenue in each sub-market. The two demand and marginal revenue curves are: PA = 9. QA = daily quantity of adults. M RA = 9. One demand curve applies to those ages 12 to 64.10QCS where PA = adult price. Quantities are measured in thousands per month and price refers to the wholesale price. The zoo’s managers recognize that there are two distinct demand curves for zoo admission. If the zoo decides to price discriminate.6 − 0.5.

what price must it charge per unit. price (if applicable). 34 . and how many units must it produce per time period in order to maximize profit? Calculate the consumer surplus. Q. consumer surplus. (b) If BCY could enforce first-degree price discrimination. 000 − 20Q. regardless of the market structure. what would be the lowest price that it would charge and how many units would it produce per time period? (c) With perfect price discrimination and ignoring any fixed cost. (i) Perfect Competition (ii) Pure Monopoly (Hint: M R = 9 − 0. (a) If BCY charges a uniform price for a unit of accounting service. BCY’s marginal cost of service is: M C = 5Q. M R = 10. Long-run average cost is a constant \$1.01Q) (iii) First Degree Price Discrimination (b) Compare the economic efficiency of each scenario.Problem 70: The BCY Corporation provides accounting services to a wide variety of customers. 000 − 10Q. most of whom have had a business association with BCY for more than five years. (a) Calculate market output. Compare the economic efficiency of each possibility. and producer surplus (profit) for each of the scenarios below. BCY’s demand and marginal revenue curves are: P = 10.50 per unit of output. The industry exhibits constant long-run average cost at all levels of output. what is total profit? How much additional consumer surplus is captured by switching from a uniform price to first-degree price discrimination? Problem 71: The industry demand curve for a particular market is: Q = 1800 − 200P.

where P is in dollars per unit.1Q The firm’s total and marginal cost curves are: C = −10Q + 0. (b) Determine the price and output rate that will allow the firm to maximize profit or minimize losses. (c) Compute a Lerner index for the firm.15Q2 (a) What is the marginal revenue curve for One Guy’s Pizza? 35 . (a) From the demand curve facing the firm. Problem 73: The local pizza market is monopolistically competitive. P = 22. One Guy’s Pizza has a cost function equal to: C(Q) = 0. and total cost C is in dollars.5 − 0. output rate Q is in units per time period. The demand equation facing One Guy’s Pizza is given by Qd = 225 − 10P or equivalently.Monopolistic Competition & Oligopoly Problem 72: A firm operating in a monopolistically competitive market faces the following demand curve: P = 10 − 0.1Qd .15Q2 + 130 and M C = −10 + 0.3Q. determine the firm’s Marginal Revenue equation. One of the local producers in the market is a pizza place called One Guy’s Pizza.

and market outlook.(b) What is the marginal cost for One Guy’s Pizza? (c) Determine the profit maximizing level of output and the price charged to customers by One Guy’s Pizza.00 per bottle. The two firms (Firm A and Firm B) are very similar in terms of their costs. strategic approach. (a) What is the profit maximizing level of output and price of a monopolist? (b) What level of output would be produced by each firm in a Cournot duopoly equilibrium? What will be the equilibrium price? (c) What would be the equilibrium level of output and price in the long run if the industry was perfectly competitive? Problem 75: Two large diversified consumer products firms are about to enter the market for a new pain reliever. the firms have very similar individual demand curves so that each firm expects to sell one-half of the total market output at any given price. T C = M C = 0). Both firms have constant long-run average costs of \$2.e. The market demand curve for the pain reliever is given as: Q = 2600 − 400P. Moreover. Patent protection insures that the two firms will operate as a duopoly for the foreseeable future. If the firms act as Cournot duopolists. solve for 36 . (d) Would you expect the price and output to be the same in a long-run equilibrium? Problem 74: Suppose that the market demand for mountain spring water is given as follows: P = 1200 − Q Mountain spring water can be produced at no cost (i. Price and quantity values are stated in per-bottle terms.

5Q. Total output is Q = (qB + qG ). (c) Compare the efficiency of the equilibrium outcomes derived in (a) and (b) above. where Q = Q1 + Q2 . (b) Given that the Grand River Brick Corporation has this information and moves first. determine the optimal output decision for Grand River Brick Corporation. (a) Determine the reaction curve for Bernard’s Bricks. Each firm has a marginal cost of zero and the two firms together face demand: P = 50 − 0. The marginal cost of producing an additional unit of bricks is constant at \$2.01Q. This gives the Grand River Brick Corporation ”first-move” ability. (a) Find the Cournot equilibrium Q1 . Problem 77: The Grand River Brick Corporation (Firm G) uses Business-to-Business internet technology to set output before Bernard’s Bricks (Firm B). The market demand for bricks is Q = 1. (b) Find the equilibrium Q and P for each firm assuming that the firms collude and share the profit equally. Q2 and P . (c) The Cournot equilibrium quantities and price. Problem 76: Consider two identical firms (Firm 1 and Firm 2) that face a linear market demand curve. (b) Firm B’s reaction curve. 000 − 100P or P = 10 − 0. 37 .(a) Firm A’s reaction curve. where qB is the output produced by Bernard’s Bricks and qG is the output produced by Grand River Brick Corporation.00 for each firm.

(c) Does the ”first-move” ability of the Grand River Brick Corporation allow them to capture a larger market share? 38 .

Solutions 39 .

388.5% Problem 6: (a) The price elasticity of demand equals zero (is completely inelastic) at a price of zero. P = \$400 Problem 4: −2. (b) Demand is infinitely elastic at a price of \$60. P = \$14. (d) The price elasticity of demand equals Problem 7: (a) P ∆Q Q ∆P = −0. Problem 3: Q = 100.36. 000. 40 P ∆Q Q ∆P = −2. .9 units per week.Supply and Demand Problem 1: (a) 20 (b) 100 (c) Shortage equal to 30 (d) Excess supply equal to 30 Problem 2: Q = 2. (c) At a price of \$30.75% Problem 5: 4.35 (b) The revenue drops by \$334.56 per unit.

11 and Y = 66.Consumer Behavior Problem 8: (a) Y = 5 (b) The first combination would be preferred as it leads to higher units of utility.25 41 .00 to buy 5 soft drinks and 10 bags of chips.5 0.67 (c) X = 11. Problem 13: (a) M RS = M US M UC (b) M RS = drinks PS PC = ⇒ 3C 3S C S = = C S 0.141 units. Problem 9: −7/15 Problem 10: − PPBA Problem 11: B = PIB − PPBA A Problem 12: (a) 500 = 10X + 5Y (b) X = 16.67 and Y = 66.17 and Y = 6. Utility declines by roughly 74. Problem 14: (a) I = PX X + PY Y ⇒ 25 = 3X + 2Y (b) X = 4.25 = 1 2 Jane should by twice as many chips as soft (c) Jane should spend her \$5.67.

01. Natasha would have a higher utility without the constrain. 42 .(c) 13.5 (d) X = 10 and Y = 10 (e) U(X=15.03 units of utility per time period.75 (c) No.5 and M UY = 2X 0. He should consume 0.Y =7. Problem 15: (a) M UX = 2Y 0.r=4) .1 r0.01 = U(c=180.1c0. the mix is not optimal. Problem 16: (a) M RS = M UX M UY (b) M RS = PX PY = ⇒ Y X Y X = 9 12 = 0.9 (b) c = 270 and r = 1 (c) U(c=300.9c−0.9 r−0. rather than his current 0. (d) U(c=270.67 Y for each X Problem 17: (a) M Uc = 0. Utility declines.75 times as much Y as X.25 > 123. Natasha is better off with buying the four tickets.43 and U(X=10.5 X 0.1 and M Ur = 0.5 (b) 750 = 25X + 50Y (c) X = 15 and Y = 7. Constraining choices of fully rational actors always leads to lower utilities.Y =10) = 40.r=1) = 154.r=0) = 0 and U(c=180.5) = 42.r=4) = 123.5 Y 0.

000 bottles Problem 21: P = \$96 Problem 22: (a) E = 40 (−4) 80 = −2 and demand is elastic. we have a normal good. Problem 20: 25. Total effect: 15 − 7 = 8 Income effect: 15 − 9 = 6 Substitution effect: (15 − 7) − (15 − 9) = 2 (b) Substitution and income effect are additive and both positive (6+2 = 8).Individual and Market Demand Problem 18: (a) Budget line: 120 = Qc + Qd (b) Qc Qd = 1 or Qc = Qd (c) Qc = 60 and Qd = 60 (d) Qc = 120 Pc +1 (e) Qd = 30 and Qc = 60 Problem 19: (a) The total effect of the price change is the difference in quantities before and after the price change. This change includes income and substitution effects. Thus. The reduction in consumption that resulted from the reduction in income to put Madame X back on the original indifference curve represents the income effect. 43 . The difference between the total effect and the income effect is the substitution effect.

the total expenditures on the good will decrease (the percentage decrease of demand is bigger than the percentage increase of the price).2 44 .if P ≥ 5 . even though the total number of artichokes sold has fallen from 80 to 72.00 Qf (P = 2.000)=7 to Q(T =6. Total expenditures increase from \$800 to \$864.68 Check Q = Qd + Qf = 500.8 by 0. Problem 24:   0 (a) Q = 1000 − 200P   5000 − 1533.(b) If the price of a good with elastic demand is increased.33P .68 = 1.00 + 666.5) = 500.68 Q(P = 2. (c) Qd (P = 2.68 (d) Only domestic demand for this price: Q = 200 Problem 25: (a) E = −0.5) = 1. Here. 166.if 3 ≥ P (b) Domestic buyers at P ≤ 5 Foreign buyers at P ≤ 3. 166. unitary elasticity at this price. this occurs at P = \$30 Problem 26: (a) Consumption falls from Q(T =5.5) = 666. (c) Demand is infinitely elastic at the price where the demand curve intersects the vertical y-axis.5 (b) T E = P ∗Q. Problem 23: (a) E = −1.000)=6.if 5 ≥ P ≥ 3 .

if 68 > P ≥ 12. 000 + 2.5(5 − 2.5 (c) CSA = 0. Problem 27: (a) CS = 0. 000 − 250P   42.5 45 . 250P . 000 CS = 0. 125.if 12.5 = \$550. 700 = \$117.8 = \$231. 722.5 − 1.65)16.25)11. 000. 000 = 18. 000P It does exists.(b) The choke price with the old tax is P = \$80. 000 (b) Government would have to by the whole excess supply: QS − QD = 1.5(68 − 1.5 . 000 = 15. 000 − 2. 000 Problem 28:   0 (a) Q = 17.2.5 > P (b) Check if an equilibrium exists at a price at which art students and others buy rubbers: 42. 000.31 CSO = 0. 000. 287. The choke price after the tax increase is P = \$78.5(\$78 − \$10)6. 625. P ∗ = 1. His consumer surplus decreases to 0. 250P = 35.if P ≥ 68 .65)21.5(5 − 2)12. 290.65 and Q∗ = 38. 000 − 2.5(\$80 − \$10)7 = \$245. 587. His consumer surplus is 0.5(12.

amount of capital remains constant (K ≈ 5. K ≈ 5. 568. 202.5 L 50 New optimal capital-labor ratio: K = 0. new input price ratio: 22.75 K .266L L Problem 33: (a) 0.5K = 0.4L (b) Hint:C = wL + rK.75 K = L 15 50 ⇒ K L = 0. 772) 46 . 524). insert wage.Production and the Cost of Production Problem 29: APLabor = Lq = 5KL L = 5K Problem 30: ∆T C =5 ∆Q Problem 31: (a) (i) T F C = 4000 (ii) AF C = 4000 Q (iii) T V C = T C − T F C = 5Q + 10Q2 (iv) AV C = (v) AT C = (vi) M C = TV C Q TC Q ∆T C ∆Q = 5 + 10Q = 4000+5Q+10Q2 Q = 5 + 20Q (b) M C = AT C ⇒ Q = 20 Problem 32: M PL and M RT S = wr M RT S = M PK 10 1. (c) Hint: M RT S = 0.6L Amount of labor is reduced (L ≈ 9. rent charge. 714) and output is reduced (Q ≈ 123.5 K = 25 ⇒ 1. and the ratio from (a) L ≈ 14. 714 and Q ≈ 157. 541.4L ⇒ K = 0.4 ⇒ K = 0. 286 hours.

Q = 1. 000.260 (C = PW W + PK K with PW including the the fee) Profit Maximization and Competitive Supply Problem 36: (a) M C = 0.25W (b) W = 20. 142. The costs rises from \$300. 000 (c) Firm should operate since P > AV C Problem 37: q = 50 and π = 6. 071 Cost for effluent fees F = 106. 000 = 12L + 52K (b) L = 9. 100 Problem 38: (a) q = 40 and π = 9.29 Problem 35: (a) K W = 0. 000 and π = −\$500. 840 47 . 880 (b) Short-run output is unaffected q = 40 and profit is reduced to π = 9.Problem 34: (a) I = wL + rK ⇒ 150. 000 and Q = 600. K = 5.15.25 or K = 0.002Q (b) Q = 50. K = 721. K ≈ 7. 375.000 to \$424. 065. 234. 000. 000 (c) W ≈ 14.

71 (c) π = 18. 000 (b) Q = 100. 040 Homer will produce and make a loss.79 and π = 4. Producing and loosing \$3. 000 and π = 10.240. 915.11 Problem 42: (a) Q = 116. Problem 40: (a) Q = 75 (b) Q = 50 Problem 41: (a) Q = 232.77 Problem 43: (a) P = 2 and Q = 50. because P > AV C(8). 000.Problem 39: 75 3 q (a) M C = 32 √ (b) q = 3 512 = 8 and π = −\$3.825 (b) q = 7.7 and P = 10.07 and π = 4. 675.040 is better than not producing and losing \$10. 000 48 .08 (b) Optimal output and profit falls: Q = 221.

(c) Firms are earning an economic profit so we would expect other firms to join this market (supply curve shifts rightwards). 49 . Problem 44: (a) Q = 500. 000 there must be 500 firms. 000 and q = 1. The price would fall causing the firms to reduce their outputs. 000 (c) Since Q = 500. 000 and P = 1 (b) q = 1. This will continue until we reach the long-term equilibrium with zero profits.

000 = \$800. 250 and P = \$50 (b) Deadweight loss 0. 000(37. 931.5 50 . 000 (b) QS = 520 and QD = 1360. 000 − 20. 000 (b) QS(P =15) = 50.22) = 2.The Analysis of Competitive Markets Problem 45: (a) P = 0.5(50 − 30)80. 000 CS = 0.5(61.5)50. Q∗ = 80. PC = \$50. QS(P =0) = 20. 000.97 Problem 47: (a) P ∗ = \$30. but producers surplus decreases. 500. We observe a shortage of 840 calls. 000 Consumer surplus increases.25 = 337. 000)30 = \$1. Not all consumers are better off: some would be willing to pay \$15. 000 CS = 0. 437. 000 + 0.11 − 40)(1250 − 972.5(50. 000 + 0.25 and Q = 1.5(50 − 37. 000 + 50. 000)15 = \$525. 000 P S = 30 · 20. 000 − 20. but because of the shortage they are unable to get cable TV. 500 P S = 15 · 20. Problem 46: (a) Q = 1.5(80.5 − 15) = \$1. Problem 48: (a) Government will be forced to buy 150 units of pork (b) Government spending: 150 ∗ 2.

5.8 ∗ 1. (d) Hint: For W = 0 we would have a negative supply of labor (LS ).125 Problem 49: (a) P S ∗ = \$22.33)12. The new minimum wage would create unemployment 0f 10. 800 P S 0 = 800 · 2.5(4 − 1.4 (b) Q0S = 21.9.6. ∆P S = P S 0 − P S ∗ = \$10.125 ∆P S = P S 0 − P S ∗ = \$253. Q0D = 4.33 P S 0 = 0. 053. Thus. but single workers might be worse of because of the increased unemployment rate.5(1.(c) QS(P =0) = 800 P S ∗ = 800 · 2 + 0. instead of searching for LS(W =0) we search for a wage where LS = 0 (reservation price). 360 For which wage would workers supply the demanded quantity of work: W = 1. 000 = \$32.5(1. Thus. 000 = \$21. (c) LD = 12. 000 + (5 − 3.25 = \$2. 000.33 − 1.33 + 0. 040 Overall producer surplus has increased.8. P S 0 = \$32. 025 − 800)2.5(3.33)12. 000 (b) A minimum wage of 3. Excess supply of 16. Try to graph LS if you have problems understanding this point P S ∗ = 0.25 + 0. Q∗ = \$16. and LS = 22.8 (c) Government spending 16.4 The increase in producer surplus does not exceed the government spendings Problem 50: (a) W ∗ = \$4. 000. the market would attain its free market equilibrium.000167LS = 3.33)16.000 person hours per year.75 = \$29. 51 . 000 − 800)2 = \$1.35 would be below the equilibrium wage and would not be binding.

608. 478. 000) = \$12.26) = \$13. 059 Problem 52: (a) P ∗ = 60 and Q∗ = 20.7 (c) P S 00 = 225.Problem 51: (a) P ∗ = 2 and Q∗ = 2. 000PS QD = QS 52 . 427 (d) They will favor the voluntary quota. 406.7 − 225. 300 (b) QS = 2.26) + 0.5(642. 000(31. They can sell the same amount of cars but receive the full price instead the price minus the tariff. 000PB QS = 20.5 millions bushels. 787.5 Government would have to buy the difference of 707.7−225. 000(31. 732 (b) Q = 42. 000 + 75. 155 Problem 53: (a) P S ∗ = P S 0 = 225.5(642. Problem 54: (a) P = 1. 797.2 and Q = 110. 608. 645 and QD = 1937. 000)(31. 000 (b) Four conditions must hold: QD = 140. 000 (b) P 0 = 67. 655. 000)(31.69 and Q0 = 16. 478. 478.26−2. 608. 000 − 25. 478. 000)+0. (c) ∆CS ≈ −1.26− 2.

000 + 75.04P = 38(P + 0.1) (c) Area A: (110. 242.79.79 − 0.97 CS = 0. 000 − 25.5(250 − 0.5(0.1 by sellers (P = 1.5 − 1.5(250 − 0.97 = \$1.3 by buyers (P = 1. Q = 102.2)0.69)9.5) and \$0.4 ∗ 102.PB = PS + 0.69. 000 − 102.5 = 375 Deadweight Loss: \$1500 Revenue from tax: 0.53)9. 500)(1.2 ⇒ PB = 1.4 In equilibrium: 140.79)9.30 (b) New equilibrium if: 10 − 0.5 = 1.81 P S = 0.97 = \$1.997. 53 .97 = \$1. The increase in consumer surplus is \$. 500)(1. Q = 9.97. choke price PC = 250. The increase in consumer and producer surplus is less than government spending. reservation price PR = 0.1) − 20 P = 0.53)9.50. QS = 9. PB = 1.53 CS = 0. 000PB = 20.2 − 1. 500 = \$41.30 (c) Government spending is \$0.97 = \$1.79 − 0. 000 per day Problem 55: (a) P = 0. 500 The tax is paid \$0. the producer surplus did not change. 000PS Hint: Substituting for PB PS = 1.1)0.10. 125 Area B: (110.2 ⇒ PS = 1. 000 − 102.31 P S = 0.50.5(0. 242.

Firm sells less than 125 and is not maximizing the profit.Market Power: Monopoly Problem 56: (a) Q = 72 (b) P = 22 (c) π = 1.5 M R = P + P E1D = 100 (b) M R = M C thus the quantity should be Q = 125. 512.5 Problem 58: (a) Q = 500 (b) Q = 250 Problem 59: p = \$55 Problem 60: (a) ED = −1. 296 Problem 57: (a) Q = 100 (b) Q = 95 (c) P = \$52. 54 .5 (d) π = \$4.

Problem 61: Deadweight loss from monopoly power is \$1. 000 and P = \$16.000 55 . 800 (d) P S = \$5.012.5 Problem 62: P = MC 1+ E1 = \$37. 400 (e) \$900 Problem 64: (a) Q = 10.8 (c) If the profit maximizing quantity is produced the deadweight loss from monopoly power is \$16.5 D Problem 63: (a) Q = 45 (b) Q = 30 (c) CS = \$1. 000 and P = \$20 (b) Q = 14.

68.5 = 1.Pricing with Market Power Problem 65: M RA = M RB = M C Problem 66: 1+(1/EA ) 1+(1/EC ) (a) PC PA = 1. 333. prices are not optimal.8 QCS = 40. PCS = \$2 T RA = \$288. T RCS = \$368 Problem 70: (a) Q∗ = 400 and P ∗ = \$6.5. Thus current prices are not optimal. Given PA = \$25. Thus. PC should be \$37.5.33 (c) π = \$3. 353. 333. Problem 68: EChild = −2. PA = \$4. 56 .000. Everything from answer (a). 000 − 6000)400 = \$800. but (b) PC PA should be 1. Problem 67: Prices should be PB = \$40 and PP = \$15.33 Loss in consumer surplus due to first-degree price discrimination is \$800. 000 CS = 0.67 and P\$ 3.25 Problem 69: QA = 60.5(10. 000 (b) Lowest price would occur if MC=AR Q = 666.

The profit for One Guy’s Pizza is π = 506.625 Monopoly results in a deadweight loss.625 (ii) Monopoly: CS+PS = \$4.5 − 0. demand will shift away from One Guy’s Pizza.2Q (b) Q∗ = 40 and P ∗ = 6 (c) L = 2 3 Problem 73: (a) M R = 22.25.25.2Qd (b) M C = 0. LMC = \$1.5(9 − 1. 500. 625. First-degree price discrimination results in a redistribution of income.5.5)1500 = \$5. which suggests that other firms will want to enter the market and in the long-run. other firms will enter. P = \$5. Problem 72: (a) M R = 10 − 0. and their profits will fall to zero. CS = 0.75 (iii) Q = 1. 57 .3Q (c) Q∗ = 45 and P ∗ = 18 (d) No. 218. CS = 0. 625 (ii) Q = 750.Problem 71: Hint: Since LAC is constant. P = LAC.5(9 − 5. P S = \$2812. 500. but does not change the overall welfare. P S = \$0.218.25)750 = \$4.5 (a) (i) Q = 1. P S = \$5.75 (iii) First Degree: CS+PS = \$5. CS = \$0 (b) Comparison of Efficiency: (i) Competition: CS+PS = \$5. LMC is also constant and equal to LAC.

50 Problem 76: (a) Q1 = Q2 = 33.66. the outcome would be the Cournot equilibrium. Therefore. QB = 200.33 and P = 16. while P = \$3. 58 . (c) If Grand River Brick Corporation did not have first-mover ability.Problem 74: (a) Q = 600 and P = 600 (b) Q1 = Q2 = 400. (c) Both cases result in inefficiency. the inefficiency (deadweight loss) is smaller when the firms compete with each other.5QA (c) QA = 600 and QB = 600. Then P = 25.5QB (b) QB = 900 − 0.5QG (b) QG = 400.66. 200 and P = 0 Problem 75: (a) QA = 900 − 0. output is restricted even further and price is significantly higher than marginal cost (which is zero in this case). However. Thus the total output is 800 and the price will be P = \$400. which is QG = QB = 266. first-mover ability has given Grand River a greater market share. Q1 = Q2 = 25. Problem 77: (a) QB = 400 − 0. (b) Q = 50 and if profits are shared equally. (c) Q = 1. Thus. When they collude.