midsolutions

midsolutions - Department of Agricultural and Resource...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Department of Agricultural and Resource Economics University of California Economics EEP101/ECON125, Spring 2003 Professor Zilberman Midterm Solutions Part 1: Market Structure and Externality 1. Numerical Questions The social optimal number of shops is 70 by equating MSB = MC , i.e., (320 - 2 Q )+ Q = 40+3 Q , and the social welfare is given by SW = R 70 0 MSBdQ - R 70 0 MCdQ = 9800 (a) Proposal One : Assume it is a competitive market, find out the optimal number of shops in Emeryville Mall Q c and the optimal price P c ; and the total social welfare and deadweight loss in comparison with the social optimality. Solution: MPB = 320 - 2 Q = 40 + 3 Q Q c = 56 (1) P c = = 320 - 2 Q c = 208 (2) c = Z 56 0 - Z 56 0 = Z 56 0 (320 - Q ) dQ - Z 56 0 (40 + 3 Q ) dQ = 9408 (3) DWL = - c = 9800 - 9408 = 392 (4) (b) Proposal Two : Assume a middleman operates Emeryville Mall. This middleman buys the future mall from the city, and sells to potential owners. find out the optimal number of shops in Emeryville Mall Q o , price this middleman pays to the city P o 1 , price potential owners pay to this middleman P o 2 ; and the total social welfare and deadweight loss in comparison with the social optimality. Solution: MR = MO = + dMC dQ Q (5) 320 - 4 Q = 40 + 3 Q + 3 Q Q o = 28 (6) P o 1 = ( Q o ) = 320 - 2 Q o = 264 (7) P o 2 = ( Q o ) = 40 + 6 Q o = 208 (8) o = Z 28 0 - Z 28 0 = Z 28 0 (320 - Q ) dQ - Z 28 0 (40 + 3 Q ) dQ = 6272 (9) = - o = 9800 - 6272 = 3528 (10) 2. Essay Question True or false, and comments on the following argument: a monopoly always creates a high deadweight loss than a competitive market in the presence of externality ( less than one page, and use diagrams ). Solution: This argument is not true. Without any externality, monopoly produces less than the social optimality level (competitive level) by charging the higher price and hence earns the the higher 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
profit, which implies that monopoly generates deadweight loss from social welfare perspective. In the presence of externality, whether a monopoly creates the higher deadweight loss than a competitive market depends on (1) features of externality, positive or negative; and (2) output levels of monopoly and social optimality. (a) As shown by Figure (1.1), if there is a positive externality, a competitive market produces ( Q c ) less than the social optimal level ( Q s ), and monopoly produces much less than the competitive level ( Q m < Q c ). Thus, monopoly generates the greater deadweight loss than a competitive
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/01/2008 for the course ECON 101 taught by Professor Wood during the Spring '07 term at Berkeley.

Page1 / 5

midsolutions - Department of Agricultural and Resource...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online