Exercises: Intermediate Microeconomics

Problem 1. Suppose the demand for apples is QD = 550 − 50P and

the industry supply curve is QS = −12.5 + 62.5P.
1. Calculate the equilibrium price and quantity.
2. Compute the consumer, producer, and total surplus for this market.

Problem 2. Consider the perfectly competitive market for gasoline. The aggregate
demand for gasoline is D (p) = 100 – p; while the aggregate supply is S (p) = 3p
1. Calculate the equilibrium price and quantity. At this equilibrium, compute the
consumer surplus, producer surplus and total surplus
2. Suppose now that the government is concerned because many gas stations are
going out of business, so it decides to set a minimum price of p¯ = 30 to help
them. What will be the new equilibrium price and quantity with this
intervention? ompute the consumer surplus and producer surplus; who gains
and who loses from this regulation? How is the total surplus affected? Briefly
explain the intuition.

Problem 3. There is a monopolist in this gasoline market. Its cost curve is C(q) = q2/6.
The aggregate demand for gasoline is D (p) = 100 – p;
1. Assume it sets a uniform price. What price and quantity does the monopolist set?
Compute the consumer surplus, producer surplus, total surplus and the
deadweight loss in this case. Compare your results to the perfectly competitive
case in the above question and explain.
2. Now suppose that the government wants to set a price ceiling in order
to maximize welfare (total surplus). What price should it set and what would be
the resulting total surplus?

Problem 4. Suppose that the food truck Cheesy Burgers has the monopoly of burgers in
the MIT campus and its cost function is given by C(Q) = 2Q. The food truck studied the
demand for burgers at MIT and found out that the inverse demand function can be
written as P(Q) = 38 - 2Q.
1. What is the socially efficient output level Qe and the optimal price Pe? What
would the firm’s profits be?
2. Solve for the equilibrium quantity Qm produced by the monopolist and the
equilibrium price Pm. What are the firm’s profits?
Problem 5: The inverse market demand of a homogeneous product in Cournot duopoly is P=
200 -3Q, with (Q = quantity produced of each firm = Q1+Q2). Total cost of each firm TC1=
26Q1 and TC2 = 32Q2. Calculate each firm’s equilibrium output and the market price ?
Problem 6. The inverse market demand of a homogeneous product in Stackelberg duopoly is
P= 16000 -4Q, with (Q = quantity produced of each firm = Q1+Q2). Total cost of each firm
TC1= 4000Q1 and TC2 = 6000Q2. Suppose firm 1 reacts as quantity leader and firm 2 as
quantity follower. Calculate each firm’s equilibrium output and the market price?