ecos3005ps1 - ii. What is the market price? iii. What are...

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INDUSTRIAL ORGANISATION - Problem set 1 Semester 2, 2010 1 Problem set 1 1. Consider a market with the following properties. All firms have identical cost technology, summarised by the following total cost curve: C ( q i ) = 1000 + 10 q i + 0 . 1 q 2 i , where q i is the output of the representative firm, i . The market (inverse) demand curve is given by P ( Q ) = 110 - 0 . 1 Q , where Q = n i = 1 q i is the total output of the n firms in the industry. (a) Cost curves i. Find an algebraic expression for the marginal cost curve, MC ( q i ) , of the rep- resentative firm. Also find the firm’s average costs, average fixed costs, and average variable costs. ii. Does the representative firm enjoy economies of scale at q i = 50? At q i = 100? At q i = 200? (b) Perfect competition - Short run i. Suppose there are 6 competitive (price-taking) firms in the market. How much does each firm produce? (Hint: Each firm is identical. Therefore assume each firm produces the same quantity).
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Unformatted text preview: ii. What is the market price? iii. What are the prots (or losses) of each rm? (c) Perfect competition - Long run (harder) i. Would we expect entry into the perfectly competitive market with 6 rms? Why, or why not? ii. How many competitive rms can be sustained in this industry in the long run? (Hint: let the number of rms in the market be n , solve for the competitive equilibrium as before, and think about the long run equilibrium conditions). iii. What about the short run? If there were 10 competitive rms in the market, what would happen in the short run? What about 100 competitive rms? (d) Monopoly i. Suppose there is a single rm operating in the market. How much would the monopolist produce? ii. What is the market price? iii. What are the prots (or losses) of the monopolist?...
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