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HW7-solution

# HW7-solution - Econ 501 Homework Assignment 7 Due Tuesday...

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Econ 501 Homework Assignment 7 Due Tuesday March 4th 1. BB 9.18 a) When P <10, only Type B firms will operate, and the market supply will be 4(2 P ) = 8 P . When P >10, both types of firms will operate, and the market supply will be 4(2 P ) + 6(-10 + P ) = -60 + 14 P . To summarize, the market supply will be { 60 14 , when 10 8 , when 10 = −+ > Supply Market Q PP Let’s first assume the equilibrium price exceeds 10, so that all firms are producing. If this is true, setting market supply equal to market demand: -60 + 14 P = 108 – 10 P , so that P = 7; however, the market supply we have used is valid for P>10, but not valid for P = 7. So the equilibrium price must be less than 10, with only Type B firms producing (and Type A firms not producing). Setting market supply equal to market demand: 8 P = 108 – 10 P , so that P = 6. We have found that in equilibrium, only Type B firms produce, and the equilibrium price is 6. b) Let’s first assume the equilibrium price exceeds 10, so that all firms are producing. If this is true, setting market supply equal to market demand: -60 + 14 P = 228 – 10 P

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HW7-solution - Econ 501 Homework Assignment 7 Due Tuesday...

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