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Soln of PS3A

1. The document compares two policies for subsidizing crop production. Under the first policy, the government buys 30 million units at $2.20 per unit for a total cost of $66 million. Under the second policy, the government provides a $0.30 per unit subsidy, allowing consumers to buy 110 million units at $1.90 per unit for a total subsidy cost of $33 million. The second policy is less expensive for the government. 2. The document analyzes the equilibrium of a sewing machine industry with 5 firms. At short-run equilibrium, output is 15 units per firm and price is $170. Average variable cost is $95 and average cost is $116.33. Profit per

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Sampad Biswas
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111 views4 pages

Soln of PS3A

1. The document compares two policies for subsidizing crop production. Under the first policy, the government buys 30 million units at $2.20 per unit for a total cost of $66 million. Under the second policy, the government provides a $0.30 per unit subsidy, allowing consumers to buy 110 million units at $1.90 per unit for a total subsidy cost of $33 million. The second policy is less expensive for the government. 2. The document analyzes the equilibrium of a sewing machine industry with 5 firms. At short-run equilibrium, output is 15 units per firm and price is $170. Average variable cost is $95 and average cost is $116.33. Profit per

Uploaded by

Sampad Biswas
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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1. Ps = .02 Qs => Qs = Ps/.

02
Pd = 3 - .01 Qd => Qd = (3-Pd)/.01
At equilibrium,

Qs = Qd
P /.02 = (3-P*)/.01
P*
= 2.00
*

Putting Ps & Pd as $2.20,


Qs = 110 million & Qd = 80 million
That means consumer will buy 80 million and the rest 30 million will be purchased by
Govt @ $2.20.
Hence, cost to Govt = $ (30 * 2.20) million = $ 66 million.

(A)

Now Govt will not buy anything, i.e. Qd = 110 million


Pd = $ 1.90
Hence subsidy / bushel = $ (2.20 1.90 ) = $ 0.30
Hence cost to Govt = $ ( 110 * 0.30) million = $ 33 million (B)
And consumers will buy 110 million @ $ 1.90

(B)

The 1st policy is more expensive for Govt.

(C )

2. Xd = 5Py 2Px +1400


x = K.L0.5 => L = x2 / K2 => L = x2 / 25

( as K = no. of sewing machines = 5)

Cost function => C = r.K + w.L + FC + m.x


= 20 + 125. (x2 / 25) + 300 + (15+4+1).x
= 5.x2 + 20.x + 320
At profit max. condition, P = MC = dc/dx = 10.x + 20 => x = (P-20)/10
Hence, Xs = N.x = 100. { (P-20)/10 } => Xs = 10.P 200
At equilibrium,
X s = Xd
10.P 200 = 5.88 2.Px +1400
(Py = 88, given)

Px = 170
(A)
Hence the profit max o/p = x = (170-20)/10 = 15

(B)

From the eqn. of cost function , TVC = 5.x2 + 20.x


Hence ,

AVC = 5.x + 20
= 5.15+20 = 95

(C )

C = 5.x2 + 20.x + 320


AC = 5.x +20 + 320 / x = 116.33

(D)

Profit in short run / day = (P* - AC ) * x = ( 170 116 1/3 ) * 15


= 810 5 = 805
L = x2 / 25 = 225 /25 = 9

(E )
(F)

At long term equilibrium, P = AC min.


For AC min. ,

d(AC)/ dx = 0
d ( 5.x + 20 + 320/x ) /dx = 0
5 320/x2
=0
x
=8

P = AC min. = (5*8 + 20 + 320/8) = 100


Xd = 5*88 2*100 + 1400 = 1640
Xd =N. x => N = 1640 / 8 = 205
Before coming to new equilibrium, 105 firms will join.

(G)

Long term equilibrium o/p of the industry = 1640

(H)

[Contribution /unit]Cappers = c = ( P AVC ) = 100 (5.x+20)


= 100 60 = 40

3. New cost func.

C = 5.x2 + 20.x + 320 + 5.x

At long term equilibrium, P = AC min.

(i)

( as sales tax imposed on each cap)

For AC min. ,

d(AC)/ dx = 0
d ( 5.x + 25 + 320/x ) /dx = 0
5 320/x2
=0
x
=8

P = AC min. = (5*8 + 25 + 320/8) = 105


Xd = 5*82 2*105 + 1400 = 1600

( As P y is reduced by 6 )

Xd =N. x => N = 1600 / 8 = 200


Before coming to new equilibrium, 5 firms will exit.

(A)

o/p / firm at long term equilibrium = x = 8

(B)

4. Xd = 2Py 2Px +18200


x = 5.L0.5 => L = x2 / 25
Cost function => C = r.K + w.L + FC + m.x
= 0 + 125. (x2 / 25) + (5400/30) + (9+8+3).x
= 5.x2 + 20.x + 180
At profit max. condition, P = MC = dc/dx = 10.x + 20 => x = (P-20)/10
Hence, Xs = N.x = 1000. { (P-20)/10 } => Xs = 100.P 2000
At equilibrium,
X s = Xd
100.P 2000 = 2.100 2.Px +18200

Px = 200

(A)
(B)
(Py = 100, given)
(C )

Hence the profit max o/p = x = (200-20)/10 = 18


From the eqn. of cost function , TVC = 5.x2 + 20.x
Hence ,

AVC = 5.x + 20
= 5.18+20 = 110
C = 5.x2 + 20.x + 180
AC = 5.x +20 + 180 / x = 120

Profit in short run = (P* - AC ) = ( 200 120 ) = 80

(D)

The market price will not be unchanged.

(E )

As there is profit, more firm will be interested to enter and as soon as more firms will
enter, the equilibrium will be changed resulting change in the price as well as profit
margin.
(F)
At long term equilibrium, P = AC min.
For AC min. ,

d(AC)/ dx = 0
d ( 5.x + 20 + 180/x ) /dx = 0
5 180/x2
=0
x
=6

P = AC min. = (5*6 + 20 + 180/6) = 80


Xd = 2*100 2*80 + 18200 = 18240
Xd =N. x => N = 18240 / 6 = 3040

5. At equilibrium,

Xs
3040 {(Px 20)/10}
306 Px
Px

(G)

=
=
=
=

Xd
2.159 2.Px +19000
25398
83

(Py = 159, given)


(A)

x = ( x1 x0 ) / x0
= [ (83-20)10 (80-20)/10 ] / [ (80-20)/10 ] * 100 %

(as x = (P-20)/10)

= 5 % increase

(B)

Cost function => C = r.K + w.L + FC + m.x + Sales Tax. x


= 0 + 125. (x2 / 25) + (5400/30) + (9+8+3).x + 2.x
= 5.x2 + 22.x + 180
At profit max. condition, P = MC = dc/dx = 10.x + 22 => x = (P-22)/10
At equilibrium,

Xs
3040 {(Px 22)/10}
306 Px
Px

=
=
=
=

Xd
2.159 2.Px +19000
26006
84.98

(Py = 159, given)

So, the firms will get price as (84.98-2) i.e. 82.98

(C )
(D)

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