# Answers_Practice3 - University of Wisconsin Economics 301...

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University of Wisconsin Economics 301: Intermediate Microeconomic Theory Korinna K. Hansen Answers to Practice Problems (part 3) Me MC 1). a). True. The marginal cost measures the cost ofproducing each additional unit of output. So it gives us the variable cost piece by piece. Ifwe add them all together we will get the aggregate variable cost. (Ifwe add up the cost ofproducing each unit ofoutput we will get the total cost of production - except for fixed cost.) b). False. If the competitive firm continues to operate even Ac though it is loosing money, it must be that the firm is covering all its variable costs (so p>min AYC) but not all ofits fixed costs (p<AC). The price \$100 must fall in-between AC and AYC. ~1)O The firm is covering all ofits variable costs and some ofits fixed costs, that's why it continues operations. Instead, shutting down would inlply incurring all fixed costs as losses. ~.~~ ~--~~~~=.~~,=~.~~=~~. ~ c), True. The long run supply curve is the portion ofthe marginal cost curve that lies above the long run average cost. AC(y )<MC(y). C( 6-) = "3 ~ l.+ 2. i- ) i ~ A CC d ) =- <1 -\- "2. OJ- ~ Me::: 61{ . We LV Q ~ of ItQI{) c. fVJ c("1J cr7 3 LL + 13- L G l.:J- -) 2.. ~ru:;:;:l (j _ (J Q (T if 0 - - ~ 3 <t =>LO 50 MCtJ))f\4.~p It ~).3 cw!Ol,o (s. .'-. ..... MC.:o6 d) i-f p~~'3. 6y 'It p-'? r~. ~y'e I -ku. ~Jq-l-e.-v. ..eu-\ IS ~~. d). True. Consider a quantity tax ofsize!.and quantity subsidy ~ofthe same size. Tax and subsidy distribute consumer and producer welfare very differently but have exactly the same dead weig~~}oss if demand and supply are linear and t =s. •. (, S. ; Guv. Su bs; ~ : B Q. €J Pc I F -:~ __CSTax W\. .. S P ~. - Subsldr \~ -hoNO GO"'<;'o.""'~ 'Pc. ·--=----.=--:. . a.. 1> Gov.!<lN~IAv.L- 6.."'-lt~ ~ ]) WL o..~OA to. .ve r1l 7 -t. ~_. fe, a..g f" ~~q}vt.-~ p e'(o. .c~'vl -J~ SQw-.e S\{ 1 ~",~l1'l~f 'I \1 (\ COy'ls'"". ..... 1>~ . VJke~ J)~ \$ O-Je. 11'\;Ae~r. ~ya (;q). v~ \ ~ P ~ J> PS D ~ . ~ e). False. The monopolist will prod~e the quantity for which MC = MR. We know tha~MC = 20 and since the demand is q = 100 - 3p, the inverse demand is p = 100/3 - q/3. Therefore, MR = 100/3-2/3q. The monopolist will set MR = MC before and after tax to maximize profits. Wlt_~_~jQx:.: W\\l,-. .~~ ~ +0. -~~O MR ~ 100 -.1= q -= ;;'0 ::;. N C l-.A R -:. ~_ ~ Q =: 02. .Q +lO ::: MC 'So, o.jkr- Q X' - '3 3 L. '-I 3 .3 \.- r D I . .'fl {\ :-~ ~ / 6 [ ~ , . ~\ - , "1"'" (~ IVVL-o . ..... v PIJU So. r t0l. .J(. .~ --/ 0< 9. -;. 00.- 0 =) j.:::: 2~ -I ~~ :::: (ou -go "7 1. ~ J _ . r ~) Go ·lo ~ ~QM,).O-wl CVrve. . Co ..Jo th.t. Je~Q~4 f~ ~ I\AO-c~ h,s rn'.Q. ... . (1 +w. prYl.A-; ~ 'i" 1 Vll.t. · At ;: 5 q >- 80 - }2 - tf, 5" p:: ~-¥::i>T ~ p ~ IEE- E- '1. -'1 :=. ¥J 3.3.- 3> - = L---.-,~>~. - P.3. .3 f ~ ~ . l.~O . . ~v.a ~ .c> I

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·~·AC. ,/ ,.. ,,!~ f). False. While it is the case that, under monopoly, some ofthe surplus that would go to consumers under perfect competition goes to monopolists as profits, that is not inefficient. What is inefficient is that the total surplus generated in the industry is less than it would have been under competition. This reduction in social surplus is the deadweight loss from monopoly. P Me g). True. This is also a monopolistically competitive firm in long run equilibrium. The AC curve is tangent to the demand curve at y*. And y*, the quantity produced is lower than the quantity that minimizes average costs. The industry has excess capacity.
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Answers_Practice3 - University of Wisconsin Economics 301...

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