midsolutions

# midsolutions - Department of Agricultural and Resource...

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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

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

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midsolutions - Department of Agricultural and Resource...

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