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Unformatted text preview: Econ 181 - Fall 2010 - Sections 103/4 April 14, 2010 Practice Problems - Suggested Answers Economies of Scale and Imperfect Competition (chapter 6): Consider a monopolistically competitive market. There are n firms in the market, each of which faces a fixed cost F , a constant marginal cost c and the demand function Q = S 1 n- b ( P- P ) , where S is the size of the market, P is the price set by the firm and P is the average price set by all firms in the market. We are interested in knowing: How many firms there will be in the market in equilibrium, i.e. what n is. This is important because each firm sells a different variety of the product, so when there are more firms every consumer is likely to find a variety that is better suited to their particular taste. What the price(s) will be in equilibrium. How these two variables, n and P , are affected by the size of the market S . In particular, if we can make unite two small markets (e.g. separate countries) to form a large marketif we can make unite two small markets (e....
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