Econ 110

Spring 2019 Name: ____________________________________

Koker and Simons

Problem Set 6 (5 points)

Each question is worth 1 point (unless otherwise specified), with sub parts equally weighted, unless
indicated otherwise.

1. (0.5 point) A competitive industry has the following demand curve: P = 100 - Q, where Q is the total
output produced. There are also a total of ten firms in this industry with the same cost curve: TC = 10 +
4q + q2. First, derive both firm and industry supply curves. Then, find the equilibrium price and quantity
in the industry. And then, calculate each firm’s profit. Is the industry in a short-run or long-run
equilibrium? Explain.

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2. (0.5 point) The good news is that you graduate from university; the bad news is that you have to look
for a job. You get an interview for your dream job in Firm A producing X. In the interview, you are told
that the firm is operating in a perfectly competitive industry.

(a) As soon as you learn the firm is operating in a perfectly competitive industry you make certain
economic assumptions about the nature of the industry, firm and product, then, state them as follows:

(b) You're asked to explain why the price elasticity of the firm’s demand curve differs from that of the
market demand curve. Explain your answer with graphs.

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3. (0.5 point) You get the job. In the very first day at work, you are told that the recent price of X is $16.

(a) You are asked to complete the following table.

Marginal
Quantity Price Total Revenue Total Cost Marginal Cost
Revenue
0 17
1 30
2 36
3 46
4 61
5 76
6 120

(b) In the first company meeting your department head, the son of a top CEO says that he is planning to
increase the production from 5 to 6 to make more profit. You think that it is a good time to score. You
raise your hand. First, present your calculation of how many product the firm should produce at the
market price of $16, and the profit the firm will make at that quantity.

(c) Then calculate how much profit the firm will make if it produces 6 units of product. Compare this
with the previous profit level. (Show your work.) Does the department head make a wise decision or he is
an idiot?

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4. You could not get along with your department head since the first meeting. When you are offered a
position as an industry analyst at the Wall Street, you accept it within a heartbeat. Your first job is to
analyze Industry A with ten identical firms in the short-run. Table I presents total market demand for
Industry A, and Table 2 shows each firm’s short-run cost structure.

Price Quantity Demanded

60 1500
70 1400
80 1300
90 1200
100 1100
110 1000
120 900
130 800
140 700
150 600

Price Output ATC AVC

50 55 102.5 65.5
60 60 99.0 65.0
70 65 96.5 65.5
80 70 95.5 66.5
90 75 95.0 68.0
100 80 95.5 70.0
110 85 96.0 72.5
120 90 97.5 75.0
130 95 99.0 78.0
140 100 101.5 81.0
150 105 103.5 84.5

(a) Calculate the short-run equilibrium price and quantity in this industry.

(b) Calculate the total profit made in Industry A. What is your recommendation as an industry analyst to
your client? Enter or do not enter? Explain.

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5. (0.5 point) You are the owner manager of a perfectly competitive firm that manufactures house
paints. The industry is in a long run equilibrium. Each firm’s long run cost curve is given by TC=36Q-
10Q2+Q3. What will be your equilibrium level of output? What will be the industry price? Suppose the
government imposes a tax of $1 for each unit of output sold. What will be the industry price after the
industry returns to long run equilibrium? What will be each firm’s level of output?

6. (0.5 point) A monopolist firm faces the following cost curve: TC = Q2 + 12, where Q is the output
produced. The demand for its product is given by P = 24 - Q. Calculate the Firm’s Profit, the Consumer
Surplus, the Producer Surplus and the Deadweight Loss associated to the monopoly.

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7. The Cleanwater Company is a monopolist that sells state-of-the art water purifying equipments in two
segregated markets, US and Canada. The daily demand curve in the US is Pus = 20 – Qus while that in
Canada is Pca = 15 – (3/2)Qca.. In these equations Qus and Qca refer to the pieces of equipment sold per
day, while Pus and Pca are the prices. If the MC of each piece of equipment is $6, calculate in each
market the profit-maximizing output level with the corresponding price and the company’s profit. Fully
graph your results.

8. (0.5 point) Female shoes are often sold at higher prices than male shoes. Why?