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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. Short-run industry supply is upward-sloping, 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 long-run in this problem is effectively short-run. 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 profit-max 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