Practice_Problems_07 - Notes 07: Answers to Practice...

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Unformatted text preview: Notes 07: Answers to Practice Problems D) This is one basic definition of the difference. E) When a price searcher chooses a to produce a given quantity, it is where P>MR. No chart. C) Peggy Sue is a price taker so she sets MR=MC=0 since MC=0 is a property of this magical well. 5. A) Cheating by firms in the cartel is always a source of instability. It is difficult for the colluding firms to verify that no one is producing above the agreed upon quantity. Having a small number of firms in the cartel makes cooperation easier, not harder. 6. C) This implies any firm could profit by producing a little more. 7. C) The price taker produces where MC=MV, namely 6 units at a price of $14. The producer surplus comes from adding up the surplus for each unit for a total of $15: Unit 1 2 3 4 5 6 MC $ 9 $ 10 $ 11 $ 12 $ 13 $ 14 MV $ 24 $ 22 $ 20 $ 18 $ 16 $ 14 PS $ 5 $ 4 $ 3 $ 2 $ 1 $ 1. 2. 3. 4. 8. E) The equilibrium quantity is 2 units, resulting in a new producer surplus of $1. Thus the deadweight loss is $14=151. 9. B) The equilibrium quantity will be 4 units, at a price of $18, with a consumer surplus of $12. The chart gives the taxadjusted data: Unit 1 2 3 4 MC $ 15 $ 16 $ 17 $ 18 MV $ 24 $ 22 $ 20 $ 18 CS $ 6 $ 4 $ 2 $ 10. E) The equilibrium price is $20 with producer surplus of $13. Unit MC MV TR MR PS 1 $ 15 $ 24 $ 24 $ 24 $ 9 2 $ 16 $ 22 $ 44 $ 20 $ 4 3 $ 17 $ 20 $ 60 $ 16 1 11. D) Marginal cost is always positive so costs always decrease since raising price involves lowering quantity. 12. D) This is another way of looking at the definition of the elasticity of demand. 13. C) Price takers can charge each consumer his or her marginal value and capture all the gains from trade. 14. B) High fixed costs deter entrants, and low marginal costs encourage firms to be very large. 15. D) In a natural monopoly without government intervention, the monopoly is a price searcher who maximizes profits where MC=MR. ...
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This note was uploaded on 03/03/2009 for the course ECON 1110 taught by Professor Wissink during the Fall '06 term at Cornell University (Engineering School).

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