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Introduction To Economic Analysis - Econ 1005Y Tutorial 2

This document contains an introduction and 12 questions related to economic analysis and concepts such as monopoly, perfect competition, costs, demand and supply. Some key points addressed in the questions include: - A monopolist facing a nonlinear demand curve will charge a price of $30 if its marginal cost is $10. - For a perfectly competitive firm, the shutdown price is $18. In equilibrium with 200 identical firms, the price is $28. Profits are zero in the short run. - With a technological change reducing costs to $10 at q=14, the long-run number of firms is 14. - Under Cournot and Stackelberg duopoly models, equilibrium prices and deadweight

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82 views5 pages

Introduction To Economic Analysis - Econ 1005Y Tutorial 2

This document contains an introduction and 12 questions related to economic analysis and concepts such as monopoly, perfect competition, costs, demand and supply. Some key points addressed in the questions include: - A monopolist facing a nonlinear demand curve will charge a price of $30 if its marginal cost is $10. - For a perfectly competitive firm, the shutdown price is $18. In equilibrium with 200 identical firms, the price is $28. Profits are zero in the short run. - With a technological change reducing costs to $10 at q=14, the long-run number of firms is 14. - Under Cournot and Stackelberg duopoly models, equilibrium prices and deadweight

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80tek
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INTRODUCTION TO ECONOMIC ANALYSIS – ECON 1005Y

TUTORIAL 2
Question 1

Question 2

Question 3

1
Question 4

A monopolist faces a downward-sloping nonlinear demand curve, with equation P =


3/Q2 = 3Q-2. If this monopolist is maximizing profit when the marginal cost is $10,
what is the price that this monopolist will charge?

Question 5

(a) A firm in a perfectly competitive constant cost industry has total costs in the short
run given by:

TC = 0.5q2 + 2q + 128

where q is output per day and TC is the total cost per day in dollars. The firm has
fixed costs of $96 (already included in the TC equation above). The TC equation
generates minimum average costs of $18 (per unit) at q = 16. You are also told that
this size firm generates minimum long run average costs (that is, minimum LRAC
occurs at q = 16, with min LRAC = $18). In the short run, what is this firm’s shut
down price?

(b) You are told that in the short run there are 200 firms, including this one, in the
industry, all with the same cost curves described above. Suppose that the demand
curve facing the industry is given by the equation
P = 38 - .004Q
where P is the price per unit and Q is the number of units demanded per day. What is
the equilibrium price in the short run?

(c) What will be the profits of the individual firm in the short-run?

(d) Given the demand curve described in (b), suppose that we are now in the long run. What
is the total output of the industry per day in the long run (to the nearest integer)?

(e) Now, in the very long run, there is a technological change that reduces the long run
minimum average cost of the typical business firm to $10 at q = 14. Now how many firms
will there be in the long run?

Question 6

2
An industry consists of two firms, each of which has variable costs of $280 per unit
but no fixed costs. The industry demand curve for a homogeneous good is P = 1000 –
2.5Q.

(a) If the firms compete under the Cournot assumptions (that is, each firm assumes
that the other firm will not change its output), then what is the price that in the Nash
equilibrium?

(b) Now suppose that one firm is a Stackelberg leader while other firm is a follower.
Assume, as usual, that the follower behaves like a Cournot duopolist (that is, assumes
that the leader's output is fixed). What will be the price set?

(c) Considering the deadweight loss from these different industry arrangements, by
how much does deadweight loss rise in moving from the Stackelberg equilibrium
obtained in question (b) to the Cournot equilibrium obtained in question (a)?

Question 7

In the market for corn, demand is given by P = 100 – Q and supply is given by P =
10 + 0.5Q. The government considers the equilibrium price too low to support
farmers continuing to produce this vital product. They would like the price of corn to
be $60 per unit. They are considering a number of alternative policies to keep prices
high and have come to you for advice on the likely effect of these policies. The
government does not just want generalities; they want specific calculations of the
gains and losses. Answer the following questions:

i. If the government does not intervene in the market for corn, what will be the
equilibrium price and equilibrium quantity traded?
ii. Draw a diagram of the market for corn, showing the equilibrium price
and quantity, the amount of excess supply which will exist at P = $60, the amount of
corn which will be demanded at a price of $60 per unit, the supply-price (minimum
price acceptable to suppliers) of the quantity that will be traded when P = $60, and
the amounts of consumer and producer surplus in the initial equilibrium before
government intervention in the corn market.
iii. Assume that the government legislates a minimum price of $60 and
enforces this minimum price. What will be the change in consumer surplus? What
will be the change in producer surplus? What is the amount of deadweight loss or
efficiency loss? Does the amount of efficiency loss depend on how producers
behave? Explain.
iv. Assume now, instead, that the government purchases sufficient output
to keep the price of corn at $60 per unit. What now is the change in consumer
surplus? Producer surplus? What is the total deadweight loss?
v. Assume now, instead, that the government establishes a quota system
to restrict the amount of corn produced by suppliers (to just the amount needed to
drive the price up to $60). What now is the amount of consumer surplus? Producer
surplus? Deadweight loss?
vi. Is your answer to (e) any different if governments restrict production
by paying farmers not to grow corn instead of establishing a compulsory quota

3
system? Assume that the government pays farmers just the right amount to just
drop production to the exact level necessary to establish a price of $60. What is the
amount of consumer surplus? Producer surplus? Deadweight loss?

Question 8

Question 9

Question 10

4
Question 11

Question 12

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