ECN 303 Practice Problems for Ch.

Problem 5 in the textbook

5. a. The Green Company’s marginal cost is MC = dC/dQ = 4 + 2Q, and the price is P = $40.
Setting MC = P implies 4 + 2Q = 40, or Q = 18 units. More generally, setting MC = P
generates the supply curve 4 + 2Q = P, or Q = (P - 4)/2.

b. With the increase in fixed cost, the firm should continue to produce 18 units. Its profit is
π = R – C = (40)(18) -[144 + (4)(18) + (18) 2] = 720 -540 = 180. Of course, the firm will
supply no output if price falls below the level of minimum average cost. We set MC = AC
and find that average cost is a minimum at Q = 12. In turn, LACMIN= 28. Thus, the firm’s
supply is zero if price falls below 28.

c. In part a (when fixed costs are 100), LACMIN = 24 at a quantity of 10 units for each firm.
Thus, the original long-run equilibrium price is 24. With elevated fixed costs, one would
expect the long-run price to rise to 28 (the new minimum level of AC). At this higher price,
total demand is reduced. However, each firm’s output would rise from 10 units to 12 units.
With reduced total demand and greater output per firm, the number of firms must decline.

Problem 7 in the textbook

7. a. The typical firm’s total cost is C = 300 + Q2/3, which implies MC = (2/3)Q and AC =
300/Q + Q/3. Setting AC = MC implies: 300/Q + Q/3 = (2/3)Q, or 300/Q = Q/3. After
rearranging, we have 900 = Q2. Therefore, Qmin = 30. In turn, ACmin= 300/30 + 30/3 =
$20.

b. Each firm’s supply curve is found by setting P = MC = (2/3)Qi. Therefore, Qi= 1.5P. With
10 firms, total supply is Qs = 10Qi = 15P. Setting QD= Qs implies 900 -15P= 15P. Thus, we
find Pc = $30. By substitution, we have: Qc = 450 and Qi= 45. At Qi= 45, each firm’s total
cost is: C= 300 + (45)2/3 =975. Thus, the typical firm’s profit is: R – C = 1,350 – 975 =
$375.

c. In long-run equilibrium, free entry ensures that P = LACmin = $20. In turn, Qc = 900 -(15)
(20) = 600. The long-run number of firms is Qc/Qmin= 600/30 = 20.

Problem 8 in the textbook

8. a. Denote Qi as the output of an individual firm.
Setting P = MC implies 16 = 4 + 4Qi, or Qi = 3.
 = (16)(3) - 80 = -32.

b. QC= 200 - (5)(16) = 120. The # of firms = QC/Qi = 120/3 = 40.

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 c. Firms will exit the industry because all are making losses. In the long run, PC = min LAC.
LAC=C/Q=50/Q+4+2Q
Set dLAC/dQ=0
50/Q2 =2
Qmin=5, and minLAC=50/5+4+2*5= $24.
At PC = $24, QC = 80, and the number of firms = 80/5 = 16.

d. Price increased enough to allow each remaining firm a zero economic profit, while Qi
increased from 3 units to 5 units (the point of minimum LAC).

Problem 9 in the textbook

9. a. Here, MC = AC = $5. Thus, PC= $5. From the price equation, 5 = 35 -5Q, implying QC= 6
million.

c. Total profit is zero. Consumer surplus is (.5)(35 -5)(6) = $90 million

A firm has the following SAC function: SAC=250/Q+20+2.5Q

a. C(Q)=SAC*Q=250+20Q+2.5Q2

b. SMC=20+5Q

c. AVC=20+2.5Q. The shut down price is minAVC=$20.

d. Set SMC=60

20+5Q=60

Q=8

Π=R – C=60(8) – [250+20(8) +2.5(8)2] = – $90.

e. Set SMC =P and solve for Q.

20+5Q=P

Q= –4+0.2P for P≥$20.

f. Qs=500(–4+0.2P) = –2,000+100P for P≥$20.

g. Qd=Qs

12,000 – 40P= –2,000+100P.

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 P=$100

Q=8,000

h. Find the minimum of LAC.

Set dLAC/dQ=0

dLAC/dQ= –250/Q2+2.5=0

Qmin=10 and minLAC=$70.

The long-run equilibrium price for the industry is $70.

i. If P=$100, the excess profits will encourage entry, raise supply and decrease price until it
falls to $70.

j. At P=$70, Qd=9,200. The industry will support 9,200/10=920 firms.