ECON201PS9 - WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS...

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WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS ECONOMICS 201-03 JOHNSON Problem Set #9 – The LAST! (due by 3 p.m. Wednesday, December 10 th ) 1. 2. Suppose an industry is characterized by monopolistic competition. Each firm in the industry has the following demand and cost curves: MC i = 10q i ATC i = 600/q i + 5q i P i = 120 – q i Where i denotes an index letter for the individual firm. Clearly the last equation above is the demand for firm i’s product based on its price. a. Calculate the monopolistic competition equilibrium in this case. What quantity will each firm produce? What price will it charge? Do we have DWL here for each individual firm? If so, what value does it take? Why? Show your equilibrium in a graph of the representative firm. b. Suppose demand for the representative firm increases to: P i = 180 – q i Calculate the new profit maximizing output level for the representative firm. Is the industry in monopolistic competition equilibrium now? Why or why not? Refer to profits in your answer. c. Suppose this industry is characterized by external economies of scale. How will the situation in (b) become a new monopolistic competition equilibrium? Draw
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ECON201PS9 - WELLESLEY COLLEGE DEPARTMENT OF ECONOMICS...

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