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Unformatted text preview: 1. total cost function is tc = $2*X mc = 2; I =100 and x = 12-2P for each i=1,..100. Captain Tony's marginal revenue curve; and Captain Tony's marginal cost curve. What is the profit maximizing number of drinks and price charged per drink to these rowdy economists? How much profit does Tony make? Calculate consumers and producers surplus and dead-weight loss. If x D = 12 - 2P, then X D = 1200 - 200P (aggregate demand) and P D = 6 - (1/200)X (the demand curve we graph). From this it follows that $mr = 6 - (2/200)X. Since $mc = 2, to profit maximize set mr = mc: i.e., 6-(2/200)X = 2 X SM = 400; x SM = 4; P SM = $4; profit SM = $800. At X SM , consumer surplus is (2)(400) = $400. At X SM , producer surplus is (2)(400) = $800. Note that net social surplus is 400 + 800 = $1200. To get dead-weight loss, note that the quantity that maximizes gains from trade is where demand intersects mc, so set 6 (1/200)X = 2 and solve to get X=800. Now dead-weight loss is the area of the hatched...
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This note was uploaded on 10/29/2009 for the course ECON 3130 taught by Professor Masson during the Fall '06 term at Cornell University (Engineering School).
- Fall '06