review session 7 handout.pdf - Fall Term 2018/19...

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Fall Term 2018/19MicroeconomicsSAIS Johns HopkinsReview Session 7Perfect Competition and Government InterventionExercise 1: Competitive equilibrium in short and long-runConsider a competitive market where the aggregate supply is given byQS= 2P-10.Each firm operating in the market has a cost function equal toTC(q) = 1.25 + 5q+ 1.25q2.The market demand isQD= 20-P.a)Find the equilibrium market price and quantity.b)Compute the individual supply function of a typical firm in the market.Howmuch is each firm producing? How many firms are active in the market?c)Compute individual firm’s profits.d)Can the situation depicted above be a long-run perfect competitive equilibrium?Why or why not? What if the price is, instead,$7.5(demand is unchanged)?1
Fall Term 2018/19MicroeconomicsSAIS Johns HopkinsExercise 2: Gov’t intervention and welfare analysisA product is sold in a perfectly competitive market. The market demand is given byQD= 20-P. The market supply isQS= 2P-10.a)Using the market demand and market supply functions,find the market equilib-rium price and quantity, and the price elasticity of demand and supply in equilibrium. Plot

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