Microeconomics Assignment 3

Name: Tran Thanh Phu

Student ID: 2011116533 – Class: K59CLC6 – Class code: 49
Email: tranthanhphu2011116533@ftu.edu.vn
Exercise 1:
a. The average total cost (ATC) for the representative farmer:
ATC = TC/Q = (100 + 5q + q2)/q = 100/q + 5 + q

b.
- In the long run, the representative firm will earn zero economic profit. This will occur when
MC = ATC for the representative firm.
MC = ATC ó 5 + 2q = 100/q + 5 + q ó q = 10
- Plug q = 10 in the ATC equation yields the price the farmer will sell for each unit: P = ATC =
(100 + 5.10 + 102)/10 = 25.
è So when P = MR = ATCmin = MC = $25, this firm will break even. Calculate total revenue:
TR = P.Q = 25.10 = $250 = TC. Therefore, the firm earns zero economic profit.

c. The total market quantity produced in this market in the long-run:

P = 100 – (1/10)Q ó 25 = 100 – (1/10)Q ó Q = 750 (units)

d. Because all farmers are identical, each produces 10 units and there are 750 units in the market,
the number of farmers in the industry in the long run is 750/10 = 75 (farmers).

e. The long-run profits for each farmer:

* When demand increases (Figure 1)
A market begins in long-run equilibrium with the firm earning zero economic profit (P =
ATCmin). But then the demand increases (D1 è D2), which raises the price and the quantity
sold, and price now exceeds ATC, leading to short-run profits. The positive profits induce entry
è the supply increases and the price falls again, restoring long-run equilibrium.
Figure 1: The change of long-run profits when demand increases
* When demand decreases (Figure 2)
A market begins in long-run equilibrium with the firm earning zero economic profit (P =
ATCmin). But then the demand decreases (D1 è D2), which lowers the price and the quantity
sold, and price now is smaller than ATC, leading to short-run losses. The negative profits induce
exit è the supply decreases and the price rises again, restoring long-run equilibrium.

Figure 2: The change of long-run profits when demand decreases

Exercise 2:
1)
- Marginal cost: MC(Q) = TC’(Q) = 20 + 2Q
- Total revenue: TR = P.Q = (200 – 2Q).Q = 200Q – 2Q2
- Marginal revenue: MR(Q) = TR’(Q) = 200 – 4Q
- The monopolist maximizes profit at the level of output where MC(Q) = MR(Q)
ó 20 + 2Q = 200 – 4Q
ó 6Q = 180
ó Q = 30 (profit-maximizing quanity)
è Thus, the profit-maximizing price is P = 200 – 2Qmax = 200 – 2.30 = 140
- The average total cost of producing 30 products: ATC = TC/Q = (20.30 + 302 + 100)/30 =
160/3
- The monopolist’s profit: p = TR – TC = (TR/Q – TC/Q).Q = (P – ATC).Q = (140 – 160/3).30
= 2600

2)
- Calculate:
+ The price consumers pay (or the monopoly price): Pc = 140
+ The price producers receive (or the marginal cost): Pp = MC(Qmax) = 20 + 2Q = 20 + 2.30 = 80
+ The efficient quantity (intersection of demand and marginal cost curves): MC = P
ó 20 + 2Q = 200 – 2Q ó 4Q = 180 ó Qefficient = 45
- The monopolist’s:
+ Consumer surplus (CS): CS = 1/2.[P(0) – Pc].Qmax = 1/2.(200 – 140).30 = 900
+ Producer surplus (PS): PS = 1/2.[Pp – MC(0)].Qmax + (Pc – Pp).Qmax = 1/2.(80 – 20).30 + (45 –
30).30 = 1350
+ Deadweight loss (DWL): DWL = 1/2.(Pc – Pp).(Qefficient – Qmax) = 1/2.(140 – 80).(45 – 30) =
450
3)
- The monopolist’s new demand curve (the demand curve shifts 90 units to the right): P2 = P(Q –
90) = 200 – 2(Q – 90) = 200 – 2Q + 180 = 380 – 2Q
- TR = P.Q = (380 – 2Q).Q = 380Q – 2Q2
- MR(Q) = TR’(Q) = 380 – 4Q
- The monopolist maximizes profit when MC(Q) = MR(Q)
ó 20 + 2Q = 380 – 4Q
ó 6Q = 360
ó Q = 60 (new profit-maximizing quanity)
è Thus, the new profit-maximizing price is P = 380 – 2Q = 380 – 2.60 = 260
- The new average total cost of producing 60 units: ATC = TC/Q = 4900/60 = 245/3
- The monopolist’s new profit: p = (P – ATC).Q = (260 – 245/3).60 = 10700

4)
- Calculate:
+ The price consumers pay (or the new monopoly price): Pc = 260
+ The price producers receive (or the new marginal cost): Pp = MC(Qmax) = 20 + 2Q = 20 + 2.60
= 140
+ The new efficient quantity: MC = P ó 20 + 2Q = 380 – 2Q ó 4Q = 360 ó Qefficient = 90
- The monopolist’s:
+ Consumer surplus (CS): CS = 1/2.[P(0) – Pc].Qmax = 1/2.(380 – 260).60 = 3600
+ Producer surplus (PS): PS = 1/2.[Pp – MC(0)].Qmax + (Pc – Pp).Qmax = 1/2.(140 – 20).60 + (260
– 140).60 = 10800
+ Deadweight loss (DWL): DWL = 1/2.(Pc – Pp).(Qefficient – Qmax) = 1/2.(260 – 140).(90 – 60) =
1800