42009 Introductory Economics Fall 2022

Problem Set 1

1) What is the maximum amount you would pay for an asset that generates an income of
$200,000 at the end of each of four years if the opportunity cost of using funds is 5
percent?

2) A firm’s current profits are $200,000. These profits are expected to grow indefinitely at a
constant annual rate of 5 percent. If the firm’s opportunity cost of funds is 7 percent,
determine the value of the firm:
a. The instant before it pays out current profits as dividends.
b. The instant after it pays out current profits as dividends.

3) What is the value of a preferred stock that pays a perpetual dividend of $150 at the end of
each year when the interest rate is 8 percent?

4) Suppose the total benefit derived from a continuous decision, Q, is B(Q) = 10Q − Q2 and
the corresponding total cost is C(Q) = 2 + Q2, so that MB(Q) = 10 − 2Q and MC(Q)= 2Q.
a. What is net benefit when Q = 2? Q = 5?
b. What is marginal benefit when Q = 2? Q = 5?
c. What level of Q maximizes total benefit?
d. What is total cost when Q = 2? Q = 5?
e. What is marginal cost when Q = 2? Q = 5?
f. What level of Q minimizes total cost?
g. What level of Q maximizes net benefits?

5) In a coffee shop, suppose that the total benefit of selling Q cup of coffee is B(Q) = 5 + 30Q
– 0.05Q2 DKK, and the cost for making one cup of coffee is C(Q) = 10 + 0.1Q
[Note: Marginal benefit: MB(Q) = 30 – 0.1Q and Marginal cost: MC(Q) = 0.1.]
a. Write out the equation for the net benefits.
b. What are the net benefits when they sell 100 cups of coffee?
c. Write out the equation for the marginal net benefits.
d. What are the marginal net benefits when they sell 100 cups of coffee?
e. How many cups of coffee they should sell to maximize net benefits?
f. When they sold certain amount of coffee that maximize the net benefit, what is the value
of marginal net benefits?
42009 Introductory Economics Fall 2022
Problem Set 1

1) What is the maximum amount you would pay for an asset that generates an income of
$200,000 at the end of each of four years if the opportunity cost of using funds is 5
percent?
200,000 200,000 200,000 200,000
𝑃𝑉 = + -
+ .
+
(1 + 0.05) (1 + 0.05) (1 + 0.05) (1 + 0.05)/

2) A firm’s current profits are $200,000. These profits are expected to grow indefinitely at a
constant annual rate of 5 percent. If the firm’s opportunity cost of funds is 7 percent,
determine the value of the firm:
a. The instant before it pays out current profits as dividends.
1 + 0.07
𝑃𝑉0123 = 200,000 ∗ = 10.7 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
(0.07 − 0.05)

b. The instant after it pays out current profits as dividends.

=>?@1A1BCDE 1 + 0.05
𝑃𝑉0123 = 200,000 ∗ = 10.5 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
(0.07 − 0.05)

3) What is the value of a preferred stock that pays a perpetual dividend of $150 at the end of
each year when the interest rate is 8 percent?
IC2FCEGJK @1A1BCDE NOP
𝑃𝑉FC2FCEG1EH = LDEC2CME 2JEC
= P.PQ
= 1875

4) Suppose the total benefit derived from a continuous decision, Q, is B(Q) = 10Q − Q2 and
the corresponding total cost is C(Q) = 2 + Q2, so that MB(Q) = 10 − 2Q and MC(Q)= 2Q.

a. What is net benefit when Q = 2? Q = 5?

𝑁𝐵(𝑄) = 𝐵(𝑄) − 𝐶(𝑄) = −2 + 10Q − 2Q2 , 𝑁𝐵(2) = 10, 𝑁𝐵(5) = −2
b. What is marginal benefit when Q = 2? Q = 5?
𝑀𝐵(2) = 6, 𝑀𝐵(5) = 0
c. What level of Q maximizes total benefit?
𝑀𝐵(𝑄) = 10 − 2𝑄 = 0, 𝑄 = 5
d. What is total cost when Q = 2? Q = 5?
𝐶(2) = 6, 𝐶(5) = 27
e. What is marginal cost when Q = 2? Q = 5?
𝑀𝐶(2) = 4, 𝑀𝐶(5) = 10
f. What level of Q minimizes total cost?
𝑀𝐶(𝑄) = 2𝑄 = 0, 𝑄 = 0
g. What level of Q maximizes net benefits?
𝑀𝑁𝐵(𝑄) = 𝑀𝐵(𝑄) − 𝑀𝐶(𝑄) = 10 − 4𝑄 = 0, 𝑄 = 2.5 (𝑇ℎ𝑢𝑠 𝑄
= 2.5 ℎ𝑎𝑣𝑒 𝑚𝑎𝑥𝑖𝑚𝑢𝑚 𝑏𝑒𝑛𝑒𝑓𝑖𝑡, ℎ𝑜𝑤𝑒𝑣𝑒𝑟 𝑖𝑓 𝑄 𝑠ℎ𝑜𝑢𝑙𝑑 𝑏𝑒 𝑡ℎ𝑒 𝑖𝑛𝑡𝑒𝑔𝑒𝑟 𝑡ℎ𝑒𝑛 𝑖𝑡 𝑐𝑎𝑛 𝑏𝑒 2 𝑜𝑟 3 )

5) In a coffee shop, suppose that the total benefit of selling Q cup of coffee is B(Q) = 5 + 30Q
– 0.05Q2 DKK, and the cost for making one cup of coffee is C(Q) = 10 + 0.1Q
[Note: Marginal benefit: MB(Q) = 30 – 0.1Q and Marginal cost: MC(Q) = 0.1.]

a. Write out the equation for the net benefits.

𝑁𝐵(𝑄) = 𝐵(𝑄) − 𝐶(𝑄) = −5 + 29.9Q − 0.05Q2
b. What are the net benefits when they sell 100 cups of coffee?
𝑁𝐵(100) = −5 + 29.9 × 100 − 0.05 × 1002 = 2,485
c. Write out the equation for the marginal net benefits.
𝑀𝑁𝐵(𝑄) = 𝑀𝐵(𝑄) − 𝑀𝐶(𝑄) = 29.9 − 0.1𝑄
d. What are the marginal net benefits when they sell 100 cups of coffee?
𝑀𝑁𝐵(100) = 29.9 − 0.1 × 100 = 19.9
e. How many cups of coffee they should sell to maximize net benefits?
𝑀𝑁𝐵(𝑄) = 𝑀𝐵(𝑄) − 𝑀𝐶(𝑄) = 29.9 − 0.1𝑄 = 0, 𝑄 = 299
f. When they sold certain amount of coffee that maximize the net benefit, what is the value
of marginal net benefits?
𝑀𝑁𝐵(𝑄) = 𝑀𝐵(𝑄) − 𝑀𝐶(𝑄) = 0
42009 Introductory Economics Fall 2022
Problem Set 2
1. Suppose the supply function for product X is given by Q#" = −30 + 2Px − 4Pz
1. How much of product X is produced when Px = $600 and Pz = $60?
2. How much of product X is produced when Px = $80 and Pz = $60?
3. Suppose Pz = $60. Determine the supply function and inverse supply function
for good X. Graph the inverse supply function.
2. The demand for good X is given by
2 2
Q/" = 6,000 − 3Px − Py + 9Pz + 26M

Research shows that the prices of related goods are given by Py = $6,500 and Pz =
$100, while the average income of individuals consuming this product is M =
$70,000.
1. Indicate whether goods Y and Z are substitutes or complements for good X.
2. Is X an inferior or a normal good?
3. How many units of good X will be purchased when Px = $5,230?
4. Determine the demand function and inverse demand function for good X.
Graph the demand curve for good X.
3. The demand curve for product X is given by Q/" = 300 − 2Px
1. Find the inverse demand curve.
2. How much consumer surplus do consumers receive when Px = $45?
3. How much consumer surplus do consumers receive when Px = $30?
4. In general, what happens to the level of consumer surplus as the price of a
good falls?
2 2
4. Suppose demand and supply are given by: Q/" = 14 − 3 Px and Q#" = 9 Px − 1

1. Determine the equilibrium price and quantity. Show the equilibrium

graphically.
2. Suppose a $12 excise tax is imposed on the good. Determine the new
equilibrium price and quantity.
3. How much tax revenue does the government earn with the $12 tax?
5. The supply curve for product X is given by Q#" = −520 + 20P"
1. Find the inverse supply curve.
2. How much surplus do producers receive when Qx = 400? When Qx = 1,200?
Answers to Problem Set 2

1. a. 𝑄𝑥𝑠 = −30 + 2(600) − 4(60) = 930 units.

b. Notice that although 𝑄𝑥𝑠 = −30 + 2(80) − 4(60) = −110, negative output is
impossible. Thus, quantity supplied is zero.

c. To find the supply function, insert Pz = 60 into the supply equation to obtain 𝑄𝑥𝑠 =
−30 + 2𝑃𝑥 − 4(60) = −270 + 2𝑃𝑥 . Thus, the supply equation is 𝑄𝑥𝑠 = −270 + 2𝑃𝑥 .
To obtain the inverse supply equation, simply solve this equation for Px to obtain
𝑃𝑥 = 135 + 0.5𝑄𝑥𝑠 . The inverse supply function is graphed in the figure below.

$450
$400
$350
$300
Price of X

$250
$200
$150
$100
$50
$0
0 100 200 300 400 500
Quantity of X

2. a. Good Y is a complement for X, while good Z is a substitute for X.

b. X is a normal good.
1 1
c. 𝑄𝑥𝑑 = 6,000 − 2 ($5,230) − $6,500 + 9($100) + 10 ($70,000) = 4,785

d. For the given income and prices of other goods, the demand function for good X is
1 1
𝑄𝑥𝑑 = 6,000 − 𝑃𝑥 − $6,500 + 9($100) + ($70,000) which simplifies to 𝑄𝑥𝑑 =
2 10
1
7,400 − 2 𝑃𝑥 . To find the inverse demand equation, solve for price to obtain 𝑃𝑥 =
14,800 − 2𝑄𝑥𝑑 . The demand function is graphed in the figure below.
 $16,000
$14,000
$12,000
Price of X $10,000
$8,000
$6,000
$4,000
$2,000
$0
0 1000 2000 3000 4000 5000 6000 7000
Quantity of X

3. a. Solve the demand function for Px to obtain the following inverse demand function:
1
𝑃𝑥 = 150 − 𝑄𝑥𝑑 .
2
b. Notice that when Px = $45, 𝑄𝑥𝑑 = 300 − 2(45) = 210 units. Also, from part a, we
know the vertical intercept of the inverse demand equation is 150. Thus, consumer
surplus is $11,025 (computed as (0.5)($150-$45)210 = $11,025).

c. When price decreases to $30, quantity demanded increases to 240 units, so consumer
surplus increases to $14,400 (computed as (0.5)($150-$30)240 = $14,400).

d. So long as the law of demand holds, a decrease in price leads to an increase in

consumer surplus, and vice versa. In general, there is an inverse relationship
between the price of a product and consumer surplus.

1 1
4. a. Equate quantity demanded and quantity supplied to obtain 14 − 2 𝑃𝑥 = 4 𝑃𝑥 − 1. Solve
this equation for Px to obtain the equilibrium price of Px = 20. The equilibrium quantity is 4
1
units (since at the equilibrium price quantity demanded is 𝑄 𝑑 = 14 − 2 (20) = 4. The
equilibrium is shown in the figure below.

$30
$25
Supply

$20
Price of X

$15
$10 Demand

$5
$0
0 1 2 3 4 5 6
Quantity of X
 b. A $12 excise tax shifts the supply curve up by the amount of the tax. Mathematically, this
means that the intercept of the inverse supply function increases by $12. Before the tax, the
inverse supply function is 𝑃 = 4 + 4𝑄 𝑠 . After the tax the inverse supply function is 𝑃 =
16 + 4𝑄 𝑠 , and the after tax supply function (obtained by solving for Qs in terms of P) is
1
given by 𝑄 𝑠 = 4 𝑃 − 4. Equating quantity demanded to after-tax quantity supplied yields
1 1
14 − 2 𝑃 = 4 𝑃 − 4. Solving for P yields the new equilibrium price of $24. Plugging this into
the demand equation yields the new equilibrium quantity, which is 2 units.

c. Since two units are sold after the tax and the tax rate is $12 per unit, total tax revenue
is $24.

5. a. The inverse supply curve is 𝑃 = 26 + 0.05𝑄.

b. When Qx = 400, producer surplus is (46 – 26) × 400/2 = $4,000. When Qx = 1,200,
producer surplus is (86 – 26) × 1,200/2 = $36,000.
42009 Introductory Economics Fall 2022
Problem Set 3
1. The demand curve for a product is given by 𝑄 = 1200 − 3𝑃 − 0.1𝑃 where Pz = $300.
a) What is the own price elasticity of demand when Px = $140? Is demand elastic or inelastic
at this price? What would happen to the firm’s revenue if it decided to charge a price
below $140?
b) What is the own price elasticity of demand when Px = $240? Is demand elastic or inelastic
at this price? What would happen to the firm’s revenue if it decided to charge a price
above $240?
c) What is the cross-price elasticity of demand between good X and good Z when Px = $140?
Are goods X and Z substitutes or complements?

2. Suppose the demand function for a firm’s product is given by

lnQ = 7 − 1.5𝑙𝑛𝑃𝑥 + 2𝑙𝑛𝑃𝑦 − 0.5𝑙𝑛𝑀 + 𝑙𝑛𝐴
where Px=$15, Py=$6, M = $40,000 (income) and A=$350 (Advertising).
a) Determine the own price elasticity of demand, and state whether demand is elastic,
inelastic, or unitary elastic.
b) Determine the cross-price elasticity of demand between good X and good Y, and state
whether these two goods are substitutes or complements.
c) Determine the income elasticity of demand, and state whether good X is a normal or
inferior good.
d) Determine the own advertising elasticity of demand.

3. You are the manager of a firm that receives revenues of $40,000 per year from product X and
$90,000 per year from product Y. The own price elasticity of demand for product X is −1.5 and the
cross-price elasticity of demand between products Y and X is −1.8. How much will your firm’s
total revenues (revenues from both products) change if you increase the price of good X by 2
percent?

4. A quant jock from your firm used a linear demand specification to estimate the demand for its
product and sent you a hard copy of the results. Use the information presented below to answer
the accompanying questions.
a) Based on these estimates, write an equation that summarizes the demand for the firm’s
product.
b) Which regression coefficients are statistically significant at the 5 percent level?
c) Comment on how well the regression line fits the data.
5. The demand function for good X is 𝑙𝑛 𝑄 = 𝑎 + 𝑏𝑙𝑛𝑃𝑥 + 𝑐𝑙𝑛𝑀 + 𝑒, where Px is the price
of X and M is income. Least squares regression reveals that â= 7.42, b = −2.18, and ĉ = 0.34.
a. If M = 55,000 and Px = 4.39, compute the own price elasticity of demand based on these
estimates. Determine whether demand is elastic or inelastic.
b. If M = 55,000 and Px = 4.39, compute the income elasticity of demand based on these estimates.
Determine whether X is a normal or inferior good.

6. You are a division manager at Toyota. If your marketing department estimates that the
semiannual demand for the Highlander is Q = 150,000 – 1.5P, what price should you charge in
order to maximize revenues from sales of the Highlander?
Answers to Problem Set 3 Fall 2022

1. a.At the given prices, quantity demanded is 750 units:

𝑄𝑥𝑑 = 1,200 − 3(140) − 0.1(300) = 750.
Substituting the relevant information into the elasticity formula gives:
𝑃 140
𝐸𝑄𝑥 ,𝑃𝑥 = −3 𝑄𝑥 = −3 750 = −0.56.
𝑥

Since this is less than one in absolute value, demand is inelastic at this price. If the firm charged
a lower price, total revenue would decrease.
b. At the given prices, quantity demanded is 450 units:
𝑄𝑥𝑑 = 1,200 − 3(240) − 0.1(300) = 450.
Substituting the relevant information into the elasticity formula gives:
𝑃 240
𝐸𝑄𝑥 ,𝑃𝑥 = −3 𝑄𝑥 = −3 750 = −1.6.
𝑥

Since this is greater than one in absolute value, demand is elastic at this price. If the firm
increased its price, total revenue would decrease.
c. At the given prices, quantity demanded is 750 units, as shown in part a. Substituting
the relevant information into the elasticity formula gives:
𝑃 300
𝐸𝑄𝑥 ,𝑃𝑧 = −0.1 𝑄𝑧 = −0.1 750 = −0.04.
𝑥

Since this number is negative, goods X and Z are complements.

2.
a. The own price elasticity of demand is simply the coefficient of ln Px, which is –1.5.
Since this number is more than one in absolute value, demand is elastic.
b. The cross-price elasticity of demand is simply the coefficient of ln Py, which is 2.
Since this number is positive, goods X and Y are substitutes.
c. The income elasticity of demand is simply the coefficient of ln M, which is –0.5. Since
this number is negative, good X is an inferior good.
d. The advertising elasticity of demand is simply the coefficient of ln A, which is 1.

3. Using the change in revenue formula for two products,

Δ𝑅 = [$40,000(1 − 1.5) + $90,000(−1.8)](0.02) = −$3,640.
 Thus, a 2 percent increase in the price of good X would cause revenues from both goods
to decrease by $3,640.

4.
a. 𝑄𝑥𝑑 = 58.87 − 1.64𝑃𝑥 + 1.11𝑀.
b. Only the coefficients for the Intercept and Income are statistically significant at the 5
percent level or better.
c. The R-square is quite low, indicating that the model explains only 14 percent of the
total variation in demand for X. The adjusted R-square is only marginally lower (13
percent), suggesting that the R-square is not the result of an excessive number of
estimated coefficients relative to the sample size. The F-statistic, however, suggests
that the overall regression is statistically significant at better than the 5 percent level.
5. a. The own-price elasticity of demand is -2.18, so demand is elastic.

b. The income elasticity of demand is 0.34, so X is a normal good.

6. To maximize revenue, Toyota should charge the price that makes demand unit elastic.
Using the own price elasticity of demand formula,
𝑃
𝐸𝑄,𝑃 = (−1.5) ( ) = −1
150,000 − 1.5𝑃
Solving this equation for P implies that the revenue maximizing price is P = $50,000.
42009 Introductory Economics Fall 2022

Problem Set 4

1. A firm can manufacture a product according to the production function

Q= F(K, L) =K3/4 L1/4
a. Calculate the average product of labor, APL, when the level of capital is fixed at 81 units and
the firm uses 16 units of labor. How does the average product of labor change when the firm
uses 256 units of labor?
b. Find an expression for the marginal product of labor, MPL, when the amount of capital is
fixed at 81 units. Then, illustrate that the marginal product of labor depends on the amount
of labor hired by calculating the marginal product of labor for 16 and 81 units of labor.
c. Suppose capital is fixed at 81 units. If the firm can sell its output at a price of $200 per unit
of output and can hire labor at $50 per unit of labor, how many units of labor should the
firm hire in order to maximize profits?

2. Explain the difference between the law of diminishing marginal returns and the law of
diminishing marginal rate of technical substitution.
3. An economist estimated that the cost function of a single-product firm is

C(Q) =100+ 20Q +15Q2 +10Q3

Based on this information, determine:

a. The fixed cost of producing 10 units of output.

b. The variable cost of producing 10 units of output.
c. The total cost of producing 10 units of output.
d. The average fixed cost of producing 10 units of output.
e. The average variable cost of producing 10 units of output.
f. The average total cost of producing 10 units of output.
g. The marginal cost when Q = 10.

4. A multiproduct firm’s cost function was recently estimated as (LO7)

C(Q1, Q2) =90 −0.5Q1Q2+ 0.4Q12 + 0.3Q22

a. Are there economies of scope in producing 10 units of product 1 and 10 units of product 2?
b. Are there cost complementarities in producing products 1 and 2?
c. Suppose the division selling product 2 is floundering and another company has made an
offer to buy the exclusive rights to produce product 2. How would the sale of the rights to
produce product 2 change the firm’s marginal cost of producing product 1?

5. Explain the difference between fixed costs, sunk costs, and variable costs. Provide an example
that illustrates that these costs are, in general, different.
42009 Introductory Economics Fall 2022

Answers to Problem Set 4

1. a. When K = 81 and L = 16, Q = (81)0.75(16)0.25 = 54. Thus, APL = Q/L = 54/16 = 3.375. When K = 81
and L = 256, Q = (81)0.75(256)0.25 = (27)(4) = 108. Thus, APL = 108/81 = 0.422.

b. The marginal product of labor is MPL = (1/4) × (81)0.75(L)-3/4 = (27/4)(L)-3/4. When L = 16, MPL =
(27/4)(16)-3/4 = 0.844. When L = 81, MPL = (27/4)(81)-3/4 = 0.25. Thus, as the number of units of labor
hired increases, the marginal product of labor decreases MPL(16) = 0.844 > 0.25 = MPL(81),
holding the level of capital fixed.

c. We must equate the value marginal product of labor to the wage and solve for L. Here, VMPL =
(P)(MPL) = ($200)(27/4)(L)-3/4=1350(L)-3/4. Setting this equal to the wage of $50 gives 1350(L)-3/4 = 50.
Solving for L, the optimal quantity of labor is L = 81.

2. The law of diminishing marginal returns is the decline in marginal productivity experienced
when input usage increases, holding all other inputs constant. In contrast, the law of diminishing
marginal rate of technical substitution is a property of a production function stating that as less
of one input is used, increasing amounts of another input must be employed to produce the
same level of output.

3.
a. FC = $100.

b. VC(10) = 20(10) + 15(10)2 + 10(10)3 = $11,700.

c. C(10) = 100 + 20(10) + 15(10)2 + 10(10)3 = $11,800.

d. AFC(10)= $100/10=$10.

e. AVC(10)=(VC(10))/10=$11,700/10=$1,170.

f. ATC(10) = AFC(10) + AVC(10) = $1,180.

g. MC(10) = 20 + 30(10) + 30(10)2 = $3,320.

4. a. For a quadratic multi-product cost function, economies of scope exist if f – aQ1Q2 > 0. In
this case, f = 90 and a = -0.5, so economies of scope exist since f is fixed cost, which is
always nonnegative.
b. Cost complementarities exist since a = -0.5 < 0, which holds in this case.
 c. Since a = -0.5 < 0, the marginal cost of producing product 1 will increase if the
division that produces product 2 is sold.

5. Fixed costs are associated with fixed inputs, and do not change when output changes. Variable costs
are costs associated with variable inputs, and do change when output changes. Sunk costs are costs that
are forever lost once they have been paid.
42009 Introductory Economics Fall 2022

Problem Set 5

1. Explain the difference between transaction costs and opportunity costs.

2. If you are a PhD supervisor, how are you going to design a solution to make your PhD
student work hard (consider it as a principle-agent problem).

3. Consider an industry that has eight firms with the following market share
percentages: 20, 20, 16, 16, 9, 8, 6, and 5.
a) Calculate the four-firm concentration ratio for this industry.
b) Calculate the Herfindahl-Hirschman index for this industry.
c) Discuss the Pros and Cons for each of the two measures for market structure.

4. Let a firm’s total cost function be TC = 800 + 8Q + 8Q2. Its marginal cost is then given
by MC = 8 + 16Q.
a) Derive an expression for the firm’s average cost function.
b) Find the range of production characterized by economies of scale.
c) Do you think the economies of scale constitute a serious barrier to entry into this
industry? Explain your reasoning.

5. Use the externality concept you learn from class to explain why everyone gets the
covid-19 vaccine for free.
42009 Introductory Economics Fall 2022

Answers to Problem Set 5

1. Transaction costs are the cost in excess of the actual amount paid to the supplier,
including the costs of locating a seller, negotiating a price and putting the product to
use. Opportunity costs are the potential benefits an individual has forgone when
making a choice over alternatives.

2. One possible way is to link the PhD student’s salary/bonus with the outputs of
journal publications, conference papers, etc.

3. The measure of market structure:

a) The four-firm concentration ratio for this industry is:
CR4=(20+20+16+16)/100= 0.72
b) The HHI for this industry is:
HHI=10000*[(20/100)2+(20/100)2+(16/100)2+(16/100)2+(9/100)2+(8/100)2+(6/10
0)2+(5/100)2]=10000*0.1518=1518
c) CR4: do not need the information of all firms but may not capture the overall
picture of the industry; HHI: cover all firms and the weights for larger firms are
higher to capture the market structure better but may not easy to get the
information of all firms in the industry.

4. a) The average cost function is AC=TC/Q=800/Q+8+8Q.

b) When MC is lower than AC, then AC is decreasing, i.e., existence of economies of
scale. Let MC=AC, we have 8+16Q=800/Q+8+8Q, i.e., Q=10. That is, when 0<Q<10,
there exist economies of scale.
c) It will depend on the demand of the industry. If the demand is much larger
(relative to 10), the economies of scale does not constitute a serious barrier to entry;
Otherwise, there will be an entry barrier due to the economies of scale.

5. With positive externality (as in the case of vaccination), the market equilibrium
quantity would be less than the social optimum. Therefore, to internalize the
externality, government will provide the subsidy to increase vaccination.