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ProbSet2_ProblemSet

ProbSet2_ProblemSet - AEM 331 Problem Set#2 Due 1 A(mini...

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AEM 331 Problem Set #2 Due 2/15/08 1. A (mini-) refrigerator monopolist, because of strong scale economies, would charge a price of $120 and sell forty-five refrigerators in Iceland. Its average cost would be $60. On the other hand, the Iceland Planning Commission has determined that five refrigerator suppliers would be sufficiently competitive to bring price into equality with average cost. The five-firm equilibrium would yield a price of $100 and a total output of fifty refrigerators. a. Consumer surplus under the five-firm industry organization would be larger than under monopoly. If the demand curve is linear, by how much is consumer surplus larger? b. Profits under monopoly are larger – by how much? i. Note: For this problem, assume that profits are the same as producer surplus. (This implicitly assumes fixed costs are non- sunk, and so are part of the producer surplus measure). Use this fact for part c. c. If the Planning Commission thinks that total economic surplus is the correct criterion, which organization of the refrigerator industry will they choose? 2. What is the best market structure for promoting technical progress? 3. In the following, let the market demand curve be P = 70 – 2 Q , and assume all sellers can produce at a constant marginal cost of c = 10, with zero fixed costs.
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