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Unformatted text preview: Intermediate Microeconomics (Econ 101) Spring, 2009 Solutions to Additional Problems in Assignment 4 Solution to Question 1. (1) True. Industry supply is the horizontal sum of firm supplies. Entry of new firms in the long run results in a flatter industry supply (and completely flat if it is a competitive industry), and hence more price elastic. (2) True. Since 3 4 + 3 4 > 1, this firm has increasing returns to scale and hence decreasing long run average cost. If the industry is competitive, then the firm faces a fixed price; but then it will keep expanding its production and eventually become the only firm in the industry, contradicting the industry being competitive. (3) False. Shortrun industry supply is upwardsloping, and hence tax burden will be shared by both the supply side and the demand side. Thus the price the consumers pay for the product will increase, but less than 2 per unit. (4) Notice that since no new firms can enter this industry, the longrun in this problem is effectively shortrun. So well compute the firms supply functions and find the horizontal sum for p 2. For firms with C ( y ) = 2 + y 2 2 : (1) MC ( y ) = y ; use profitmax condition ( p = MC ) we have y = p ; (2) LAC ( y ) = 2 y + y 2 . To find the minimum of LAC, take FOC: 2 y 2 + 1 2 = 0 y = 2. Thus min( LAC ) = LAC (2) = 2; (3) The supply function is S ( p ) = p for p 2 and S ( p ) = 0 for p < 2. For firms with C ( y ) = y 2 4 : (1) MC ( y ) = y 2 y = 2 p ; (2) LAC ( y ) = y 4 , thus min( LAC ) = 0; (3) The supply function is S ( p ) = 2 p for all p 0....
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 Spring '08
 DANNICATAMBAY
 Microeconomics

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