Midtern 1 Fall 09

Midtern 1 Fall 09 - Economics 100C Microeconomics C...

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Economics 100C: Microeconomics C Solutions to Midterm 1: Fall 2009 1. (15 pts) Consider the short run market for toothpicks. This market is perfectly competitive with a price of $1 per box. Ace Toothpicks has the short run cost function C ( q ) = F + 0.01 q 2 where F > 0. a. Find this company’s profit maximizing quantity. () ( ) 2 max 0.01 : 10 . 0 2 0 *5 0 q qp q C qq F q FOC q q q π =− = = = b. For what values of F (if any) will the firm shutdown? Briefly explain. () 0.01 50 0.5 1 AVC q q AVC p = =< = AVC < p regardless of F. The firm won’t shutdown for any values of F. c. For what values of F (if any) would more firms enter this market in the long run? Briefly explain. (You can assume that once any firm enters, it will have the same short run cost function as Ace Toothpicks.) In the long run firms will enter as long as profit is positive. ( ) 2 150 0 .0150 0 25 F F
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2. (24 pts) A monopolist has the long run cost function of ( ) 2 100 2 CQ Q =+ if Q > 0. Its long run cost function is 0 if Q = 0. Inverse market demand is equal to () 160 2 D PQ Q =− . a. Assuming no shut down find the monopolists profit maximizing price and quantity. () () ( ) ( ) 2 max 160 2 100 2 : 160 4 4 0 20 160 2 20 120 D Q M M QP Q Q C Q Q Q Q FOC QQ Q Q P π = −= = = b. Will the monopolist shut down? Explain.
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Midtern 1 Fall 09 - Economics 100C Microeconomics C...

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