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Midterm 1 Answers Problem 1 (i) Average costs are minimized at q = 10 for technology 1 and at q = 30 for technology 2. (ii) It would prefer technology 2, because C 1(40) = \$63,800, whereas C 2(40) = \$38,500. Problem 2. The equilibrium occurs where the inverse demand curve intersects the inverse supply curve. The equilibrium quantity is found by setting the inverse demand curve equal to the inverse supply curve. The equilibrium quantity is then substituted into the inverse demand or supply curve to find the equilibrium price. 100 0.25 = 20 + 0.55 Q 80 = 0.80 Q 100 = Q p = 100 0.25(100) p = 75 The consumer surplus is the amount above the price paid that consumers would willingly spend to consume the units purchased. Here, consumer surplus is the triangle under the inverse demand curve above the equilibrium price. Consumer Surplus = 0.5 (100 75)(100) Consumer Surplus = 1250 The producer surplus is the largest amount that could be subtracted from supplier revenue and suppliers would still produce the good. Here, producer surplus is the triangle above the inverse

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