PRACTICE

1. Suppose there is a perfectly competitive industry where all the firms are identical with
identical cost curves. A representative firm’s total cost : TC = 100 + q2 + q where q is the
quantity of output produced by the firm; the market demand for this product: P= 1000 – 2Q
where Q is the market quantity; the market supply curve is given by the equation P = 100 + Q.
a. What is the equilibrium quantity and price in this market given this information?
b. The firm’s MC equation based upon its TC equation is MC = 2q + 1. Given this
information and your answer in part (a), what is the firm’s profit maximizing level
of production, total revenue, total cost and profit at this market equilibrium? Is
this a short-run or long-run equilibrium? Explain your answer.
c. Given your answer in part (b), what do you anticipate will happen in this market
in the long-run?
d. In this market, what is the long-run equilibrium price and what is the long-run
equilibrium quantity for a representative firm to produce? Explain your answer.
e. Given the long-run equilibrium price you calculated in part (d), how many units
of this good are produced in this market?

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

P = 100 - 0.01Q
where Q is weekly production and P is price, measured in cents per unit. The firm’s cost
function is given by C = 50Q + 30,000. Assuming the firm maximizes profits,
a. What is the level of production, price, and total profit per week?
b. If the government decides to levy a tax of 10 cents per unit on this product, what
will be the new level of production, price, and profit?

3. A firm in perfect competitive market has VC ($) = 2Q2 + 10Q and FC ($) =200, where Q is in
units.
a. At P = $150, pls. calculate Q* and Profit at profit MAX
b. Calculate the break-even point of this firm .
c. What is the firm’s decision when the market price is P = $10?
d. At what price should this firm close its business?
Present all the above results on a graph.
4. Statistics about a perfectly competitive market of a good are as below:

P ($/unit)
15 18 21 24 27 30
Qd(unit) 500 440 380 320 260 200
Qs (unit) 250 400 550 700 850 1000

a. demand and supply functions?

b. market equilibrium price and quantity?
c. consumer surplus and producer surplus?
d. Calculate the actual quantity in the market at the price of P1 = $18 and P2=$11

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 e. There is negative externality in the market. Estimated value of the negative impact on
bystanders is $2/unit. Write the social cost function. What is the optimum outcome to society.
Compare with answers in part (b). What should Government do to internalize this externality?

5. A monopolist runs business with the demand curve: P($) = 250-Q

, with the firm’s cost functions is TC($)=1.5Q2 + 40Q +100

a. Pls. calculate P*, Q* and Profit MAX. What is the consumers’ surplus in this case?
b. Pls. calculate the DWL caused by this monopolist
c. To reduce the deficit budget, government imposes 20$/ unit tax on producer. Pls. calculate new
P*, Q* and ∏ when this firm still wants to maximize profit?
d. For the case Government imposes a fixed tax amount of 200$ (a lump sum tax) on producer.
Calculate new P*, Q* and ∏ when this firm still wants to maximize profit?
Present all the above results on a graph