WELLESLEY COLLEGE
DEPARTMENT OF ECONOMICS
ECONOMICS 20103
JOHNSON
Problem
Set
#6
(due IN LECTURE Friday, October 31
st
 BOO!)
1.
P&R, page 307, #10.
Add:
a.
To this part, also calculate the number of firms in the industry.
e.
Find the LR equilibrium output for the industry and for each firm in this
industry.
Thus, find the new number of firms after either entry or exit has
occurred from your answer in (b).
Also, then, find the new number of firms
after LR equilibrium has been reached.
(It may not be an integer, but run with
it.
It should, however, reflect the entry or exit you found in (b).
Namely, if you
said entry in (b), your new LR number of firms should be HIGHER than the
number you found in my added part (a) above).
2.
Suppose Jerry’s Jumbo Jelly Roll Jamboree has the following total cost
function:
TC ( A , r , w , K
0
, q )
=
r K
0
+
wq
3
/ A
2
K
0
This function may look familiar, with
A
a measure of technological progress.
Assume capital is fixed at
K
0
for our purposes in this problem.
a.
If Jerry is a profit maximizing price taker in the competitive market for jelly
rolls and can sell them for a price
P
in that market, find an expression for his
supply curve
q
S
(A , w , K
0
, P ) .
What is Jerry’s own price elasticity of
supply?
Sketch, in an appropriate diagram, Jerry’s supply curve for the case in
which
r = $48 / unit,
w = $1 / hour ,
A = 1 , and K
0
=
3 .
b.
With the same numbers in (a), find Jerry’s profit maximizing output and the
corresponding profit if
P = $64 / roll (remember, they’re jumbo!).
Calculate his
producer surplus.
You may integrate here, but you should also be able to find it
using simpler means.
Integrate to check yourself should you feel so inclined.
Again, sketch his supply curve in this case and shade the appropriate producer
surplus.
c.
Is the jumbo jelly roll industry in long run equilibrium?
Why or why not?
If
not, calculate the long run equilibrium price and each individual firm’s long run
production level.
Assume all firms in this industry are identical to Jerry.
Assume the same values input prices, technological progress, and capital as you
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View Full Documentdid in (a) and (b) above.
So K
0
represents the nonsunk fixed costs level in the
LR.
d.
Now, beginning at the long run equilibrium you found in (c), characterize the
response of this industry to an increase in A , ceteris paribus.
Thus, only A
rises, while input prices and capital remain fixed.
Explain both short run and
long run behavior.
Use a diagram if you wish, but try to concentrate on the
intuition before you start sketching.
3.
This question asks you to consider comparative statics effects on the perfectly
competitive firm behavior model that don’t involve changes in market demand.
Thus, consider the following information:
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 Fall '08
 JOHNSON
 Economics, Supply And Demand, LR Equilibrium, Jerry Springer

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