{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

ps4_fall10_b_solutions

# ps4_fall10_b_solutions - Econ 3332 Intermediate...

This preview shows pages 1–3. Sign up to view the full content.

Econ 3332 Intermediate Microeconomics Professor Scott Imberman Problem Set 4 1) Bernheim & Whinston, pg. 323, exercise 9.8 If Dan produces, he will choose a quantity that satisfies the quantity rule: P = MC P = 4 + (Q/20) P – 4 = Q/20 20P – 80 = Q Dan will only produce, however, if the price is higher than the minimum of average cost. Since cost is C(Q) = 4Q + (Q 2 /40), then AC(Q), which is just C(Q)/Q must be 4 + (Q/40). Just from looking at the function, we can tell that the minimum of AC(Q) occurs at a quantity of zero (or just about zero) and that the minimum AC(Q) is \$4. Therefore, Dan will produce at any price greater than or equal to \$4, and his supply function is: S(P) = 0i f \$ 20 80 if \$4 P PP ⎧⎫ < ⎪⎪ ⎨⎬ −≥ ⎩⎭ 4 5 If Dan has an avoidable fixed cost of \$10, then his cost function for producing becomes C(Q) = 4Q + (Q 2 /40) + 10, and his average cost becomes 4 + (Q/40) + (10/Q). To find the minimum of this AC(Q) function, we have to set it equal to MC(Q). AC(Q) = MC(Q) 4 + (Q/40) + (10/Q) = 4 + (Q/20) (Q/40) + (10/Q) = (Q/20) (10/Q) = (Q/40) Q 2 = 400 Q = 20 We can then see that AC(20) = MC(20) = \$5. This means that Dan will only produce in this case if the price is greater than or equal to \$5. If he does produce, he still uses the same condition as above, so his supply function would be: S(P) = f \$ 20 80 if \$5 P < 2) Bernheim & Whinston, pg. 401, exercise 11.3.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
We know that expected consumption at point A is 500. Therefore we need to figure out some points using the probabilities provided where expected consumption is the same.
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

### Page1 / 5

ps4_fall10_b_solutions - Econ 3332 Intermediate...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online