ECON 2001 MIDSEMESTER MARATHON

Equations
Analysis of Competitive Markets
• For taxes, subtract the tax from the targeted side of the market
Eg if Govt wants to reduce consumption : Demand curve -Tax = Supply Curve
The tax per unit is the difference between what the Consumers pay and what the Supplier
receives.
• For subsidies, add the tax to the targeted side of the market
Eg. If government wants to protect farmers: Demand Curve= Supply Curve
The tax per unit is the difference between what the Supplier gets and what the Consumer
pays.
Competition (Monopoly, Oligopoly, Monopolistic Competition, Perfect Competition)
• Profit= (P-AC)Q
• TR= P*Q
• MR= f-1(TR) wrt Q
• AR=Demand (in all models)
• MR=AR (ONLY IN PREFECT COMPETITION)
• TC=AC x Q
• AC= TC/Q
• MC= f-1(TC) wrt Q
• Profit maximization point MC=MR
• To find the Cournot reaction curves:
a) Equate MR=MC, then
b) Rewrite the new equation in terms of each firm’s Q

Chapter 8 (Analysis of Competitive Markets)

1. Suppose that a competitive firm’s marginal cost of producing output q is given by
MC(q) = 3 + 2q. Assume that the market price of the firm’s product is $9.
a. What level of output will the firm produce?
b. What is the firm’s producer surplus?
c. Suppose that the average variable cost of the firm is given by AVC(q) = 3 + q.
Suppose that the firm’s fixed costs are known to be $3. Will the firm be earning a
positive, negative, or zero profit in the short run?
2. Suppose you are given the following information about a particular industry:
QD = 6500 - 100P Market demand
QS = 1200P Market supply
C(q) = 722 + q2/200 Firm total cost function
MC(q) = 2q/ 200 Firm marginal cost function
Assume that all firms are identical and that the market is characterized by perfect
competition.
a) Find the equilibrium price, the equilibrium quantity, the output supplied by the
firm, and the profit of each firm.
b) Would you expect to see entry into or exit from the industry in the long run?
Explain. What effect will entry or exit have on market equilibrium?
c) What is the lowest price at which each firm would sell its output in the long run?
Is profit positive, negative, or zero at this price? Explain.
 3. (MCQ)

Chapter 9 (Perfect Competition)

4. Suppose the market for widgets can be described by the following equations:
Demand: P = 10 - Q
Supply: P = Q - 4
where P is the price in dollars per unit and Q is the quantity in thousands of units. Then:
a. What is the equilibrium price and quantity?
b. Suppose the government imposes a tax of $1 per unit to reduce widget consumption
and raise government revenues. What will the new equilibrium quantity be? What price
will the buyer pay? What amount per unit will the seller receive?
c. Suppose the government has a change of heart about the importance of widgets to the
happiness of the American public. The tax is removed and a subsidy of $1 per unit
granted to widget producers. What will the equilibrium quantity be? What price will the
buyer pay? What amount per unit (including the subsidy) will the seller receive? What
will be the total cost to the government?
5. (MCQ)

Chapter 10 (Monopoly)

6. A firm faces the following average revenue (demand) curve:

P = 120 - 0.02Q
where Q is weekly production and P is price, measured in cents per unit. The firm’s cost
function is given by C = 60Q + 25,000. Assume that the firm maximizes profits. What is
the level of production, price, and total profit per week?
7. (MCQ)

Chapter 12 (Oligopoly and Monopolistic Competition)

8. A monopolist can produce at a constant average (and marginal) cost of AC = MC = $5. It

faces a market demand curve given by Q = 53 - P.
a) Calculate the profit-maximizing price and quantity for this monopolist. Also
calculate its profits.
b) Suppose a second firm enters the market. Let Q1 be the output of the first firm
and Q2 be the output of the second. Market demand is now given by Q1 + Q2 =
53 – P. Assuming that this second firm has the same costs as the first, write the
profits of each firm as functions of Q1 and Q2.
c) Suppose (as in the Cournot model) that each firm chooses its profit-maximizing
level of output on the assumption that its competitor’s output is fixed. Find each
firm’s “reaction curve” (i.e., the rule that gives its desired output in terms of its
competitor’s output).
d) Calculate the Cournot equilibrium (i.e., the values of Q1 and Q2 for which each
firm is doing as well as it can given its competitor’s output). What are the
resulting market price and profits of each firm?
9. (MCQ)