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WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS ECONOMICS 201-03 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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did in (a) and (b) above. So K 0 represents the non-sunk 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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This note was uploaded on 06/15/2010 for the course ECON 201 taught by Professor Johnson during the Fall '08 term at Wellesley College.

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