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CHAPTER 12 THE PARTIAL EQUILIBRIUM COMPETITIVE MODEL The problems in this chapter focus on competitive supply behavior in both the short and long runs. For short-run analysis, students are usually asked to construct the industry supply curve (by summing firms' marginal cost curves) and then to describe the resulting market equilibrium. The long-run problems (12.4-12.7), on the other hand, make extensive use of the equilibrium condition P = MC = AC to derive results. In most cases, students are asked to graph their solutions because such graphs provide considerable intuition about what is going on. The analytical problems here mainly involve taxation. Problem 12.9 shows that many of the results for per-unit taxes introduced in the chapter carry over for ad valorem taxes. Problem 12.10 introduces the Ramsey formula for optimal taxation. Comments on Problems 12.1 This problem asks students to constructs a marginal cost function from a cubic cost function and use this to derive a supply curve and a supply-demand equilibrium. The math is rather easy so this is a good starting problem. 12.2 A problem that illustrates "interaction effects." As industry output expands, the wage for diamond cutters rises, thereby raising costs for all firms. 12.3 This is a simple, though at times tedious, problem that shows that any one firm's output decision has very little effect on market price. That is shown to be especially true when other firms exhibit an elastic supply response in reaction to any price changes induced by any one firm’s altering its output. That is, any one firm’s output decision’s effect on price is moderated by the induced effect on other firms’ output decisions. 12.4 This is a simple problem in the interaction between short-run and long-run analysis. The long-run equilibrium price is always $10. But the price may diverge from this in the short run. 12.5 This problem introduces the concept of increasing input costs into long-sun analysis by assuming that entrepreneurial wages are bid up as the industry expands. Solving part (b) can be a bit tricky; perhaps an educated guess is the best way to proceed. 12.6 This is a problem in (short-run) tax incidence. The final part of the problem concerns the change in short-run producer surplus as a result of the tax. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold, copied, or distributed without the prior consent of the publisher. 96
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97 Chapter 12: The Partial Equilibrium Competitive Model 12.7 This is a problem in long-run producer surplus. It makes the point that the producer’s share of any tax is ultimately borne by that input which is in inelastic supply. Here it is the film studio that incurs all of the producer’s share of the tax burden.
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This note was uploaded on 06/09/2010 for the course AP 4010 taught by Professor Anam,mahmudul during the Winter '10 term at York University.

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