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Unformatted text preview: Econ 302- Solution to Problem Set 12 Spring 2010-Ali Toossi Due: Wednesday April 28 at the beginning of the class Chapter 11: Questions for review Answer to question 4. Price = TR/Q, so this firm's demand curve is given by P=a - 2Q. Since its price is a declining function of output, it cannot be a perfectly competitive firm. Answer to question 8. The effect of such a tax is to produce a parallel upward movement in each firm's long-run average cost curve. The output level for which the minimum value of LAC occurs will thus be the same as before, which means that firms in long-run equilibrium will each have the same amount of output as before. So true. Answer to question 9. A firm will have a long-run marginal cost function that is above average cost for all points past the minimum point on the long-run average cost curve. If demand causes price to be above the minimum average cost in the short-run, then firms could be operating where price equals long-run marginal cost and they could be making economic profits. When entry occurs in the long-run the price will fall and price will equal long-run marginal cost at the long-run equilibrium output level. Thus the statement is false. See the diagram on the next page. P L A C L M C S A C S M C P * $ /Q Q Q * Q 0 0 Answer to question 10. Consumer surplus in a competitive industry is the area between the price line and the market demand curve, not the individual firm's demand curve. Since the market demand curve is downward sloping, there will in general be positive consumer surplus. Indeed, curve is downward sloping, there will in general be positive consumer surplus....
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This note was uploaded on 02/14/2011 for the course ECON 302 taught by Professor Avrin-rad during the Spring '09 term at University of Illinois, Urbana Champaign.
- Spring '09