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Some Additional Problems to Consider in Preparation for Exam #2 1.

Do the following two production functions exhibit increasing, decreasing, or constant returns to scale? Explain. Q = 0.5KL Q = 2 L + 3K For one of the two production functions, the MRTS is constant. Which one is it and why? 2. Pyramid Corporation is currently employing 20 tons of cement and 40 tons of steel to produce 50,000 square feet of shopping space in a mall. Cement costs \$20 a ton and steel costs \$60 per ton. At the input quantities employed the marginal product of cement is MPc = 12 and MPs = 6. Is Pyramid currently minimizing its long-run costs? If not, what should it do if it wants to produce 40,000 square feet of shopping space at minimum long-run cost? In the long run, what is the MRTS? 3. A perfectly competitive industry is composed of a large number of firms, each with the total cost function: SRTC = q2 + 1, and the marginal cost function: SRMC = 2q. The demand curve facing the industry is Qd = 52 p. a. What are the long-run equilibrium price, number of firms, and profit per firm in this industry? b. If demand shifts to Qd = 60 p what are the long-run price, equilibrium number of firms, and profit per firm. 4. Downtown Philadelphia is famous for its soft pretzel stands. There are hundreds of such stands located on street corners. Suppose the Philadelphia soft pretzel retail market is a perfectly competitive constant-cost industry. If the manufacturers of Philadelphias soft pretzels (the wholesalers) increase the price of pretzels from \$1.20 a dozen to \$1.60 a dozen, use graphs to answer the following questions: a. How will this input price increase affect the cost curves of a typical soft pretzel stand owner in the short run? b. What will happen to the stand owners price, output, and profit in the short run? c. What happens to both consumer and producer surplus in the short run as a result of the increase in the wholesale price of pretzels? d. What will happen in the long run? 5. The demand curve for a monopolist is: P = 100 (1/4)Q. The total cost curve is TC = \$500 + 10Q. Thus, marginal cost is equal to 10. a. Solve for the profit-maximizing level of output and price for the monopolist. What is the profit at that point? b. Is this monopolist a natural monopolist? Explain. c. If a government regulator wanted to set a price guaranteeing the monopolist a fair return on investment, what ceiling price should the regulator set? What would be the effect of this regulation on consumer and producer surplus?

Some Additional Problems to Consider in Preparation for Exam #2 d. Suppose that the regulator set the ceiling price equal to the marginal cost of \$10 and provided a subsidy of \$500 to the monopolist. What would be the effect of this regulatory regime on consumer and producer surplus compared to your answers to parts a and c of this question? 6. Repeat your answers to question #5, but in this case assuming that the monopolists inverse demand equation is P = \$490 2Q and TC = 20 + 10Q + 2Q2, so that MC = 10 + 4Q. 7. Consider a monopolist with two plants with the following marginal cost functions: MCa = 18 + (1/2)qa and MCb = 6 + (1/2)qb. The monopolists inverse demand function is P = \$30 (1/4)Q. a. Compute the monopolists marginal revenue function. b. What rule should the monopolist use to allocate output between his two plants? c. Solve for the profit-maximizing output in each plant. d. Solve for the monopolists profit-maximizing profit. e. Solve for the monopolists producer surplus. f. Solve for consumer surplus. g. If the monopoly operated as a perfectly competitive market, what would be the values of the equilibrium output and price? h. What would be the values of the consumer and producer surplus under competition? i. What is the excess burden for this monopolist?