NAME: Nguyễn Quốc Duy

CLASS:BA1707
ID:CS171997

HOMEWORK 3
1. For each of the following characteristics, state whether it describes a
monopoly, a monopolistically competitive firm, or both.
a. facing a downward sloping demand curve: both
- For a monopoly firm: since it is the only seller in the market, the firm demand
curve is also the market demand curve, which slopes down to the right.
- For monopolistically competitive firms: Since all firms have a little monopoly
power, they can control the price of their products, showing that the firm's
demand curve slopes downwards to the right.
b. has marginal revenue less than price: Both
- For a monopolist, because it has to lower the price to sell more products,
marginal revenue is lower than the price for all output levels except the first
unit.
- For monopolistically competitive firms: the more competitive the price is, the
smaller the revenue will be and the marginally smaller the price.
c. facing the entry of new firms selling similar products: A monopolistically
competitive firm
- For monopolistically competitive firms: In monopolistic competition, firms are
willing to enter and exit the market easily.
d. earn economic profits in the long run: a monopoly
Because monopolistic markets are difficult to enter and eventually exit, a
monopolist will always have long-term economic profits.
e. balance between marginal revenue and marginal cost - Both
- Because this feature helps both companies to optimize profits
f. produce socially efficient quantities of output: Neither
-Because only a perfectly competitive market can produce a socially efficient
quantity of output

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2. Consider a monopolistically competitive market with N firms. Each
firm’s business opportunities are described by the following equations:
Demand: Q = 100/N – P
Marginal Revenue: MR = 100/N – 2Q
Total cost: TC = 50 + Q2
Marginal cost: MC = 2Q
a. How does N, the number of firms in the market, affect each firm’s
demand curve? Why?
An increase in N reduces each firm's demand.
Because N is below the denominator of the fraction, an increase in the number
of firms decreases the quantity demanded. This shifts each firm's demand curve
to the left. An increase in N reduces each firm's demand.
b. How many units does each firm produce? (The answers to this and the next
two questions depend on N)
MR=MC=> 100/N – 2Q = 2Q  4Q = 100/N => Q = 25/N=25(N=1)
c. What price does each firm charge?
Q= 25/N = 100/N – P  P = 75/N=75(N=1)
d. How much profit does each firm make?
Profit= TR-TC
= 75/N x 25/N – (50+ 252/N2)
= 1875/N2 – 50 – 252/N2 => Profit = 1250/N2- 50=1200(N=1)
e. In the long run, how many firms will exist in this market?
In the long run, the profits of the firms will become 0
=>1250/N2-50=0
=>N=5
3. Four roommates are planning to spend the weekend in their dorm room
watching old movies, and they are debating how many to watch. Here is
their willingness to pay for each film:
Steve Joe Gus Tim
First firm $7 $5 $3 $2
Second 6 4 2 1
film
Third film 5 3 1 0
Fourth 4 2 0 0
firm
Fifth firm 3 1 0 0

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a. Within the dorm room, is the showing of a movie a public good? Why or why
not?
Within the dorm room, the showing of a movie is a public good. None of the
roommates can be excluded from viewing the movie. Because one roommate’s
viewing does not affect the ability of another roommate to view the movie, the
good is also nonrival in consumption.
b. If it costs $10 to rent a movie, how many movies should the roommates rent
to maximize total surplus?
The roommates should rent three movies because the value of the fourth film
($6) would be less than
the cost ($8)
The roommates should rent three movies because the value of the fourth film
($6) would be less than
the cost ($8)
The roommates should rent three movies because the value of the fourth film
($6) would be less than
the cost ($8)
If it costs $10 to rent a movie, Dorm roommates should rent two movies
because the value of the third movie $9 will be less than the cost of $10.
c. If they choose the optimal number from part (b) and then split the cost of
renting the movies equally, how much surplus does each person obtain from
watching the movies?
Total cost = 10x2 = $20, it will cost each person $5.
Steve priced the two movies at $7 + $6 = $13 so his surplus would be $13 - $5 =
$8.
Joe values the two movies at $5 + $4 = $9 so his surplus will be $9- $5 = $4.
Gus priced the two movies at $3 + $2 = $5, so his surplus would be $0.
Tim values the two movies at $3 so his surplus is $3 - $5 = - $2.
Total surplus: $8 + $4 - $2 = $10.
d. Suppose they agree in advance to choose the efficient number and to split the
cost of the movies equally. When Steven is asked his willingness to pay, will he
have an incentive to tell the truth? If so, why? If not, what will he be tempted to
say?
Because they are going to pay equal shares, Steven has the incentive to tell the
truth about the value he places on movies to ensure that the group rents two
movies. He values each of the movies more than his cost per movie.
4. Your enterprising uncle opens a sandwich shop that employs 7 people.
The employees are paid $12 per hour, and a sandwich sells for $6. If your
uncle is maximizing his profit, what is the value of the marginal product of
the last worker he hired? What is that worker’s marginal product?
If my uncle is maximizing his profit. The value of the marginal product of the
last worker he hired is $12. That worker's marginal product is 2 sandwiches per
hour.
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