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.
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