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HW5 11-18-09

# HW5 11-18-09 - down by \$76 The consumer prefers 75 bread...

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ECO 304K INTRO MICRO Fall 2009 Hickenbottom HOMEWORK #5 (Due November 18 th at 1pm) 1. The market demand curve for a good is P = -3Q + 375. The marginal cost for the same good is MC = 2Q + 15. a) Find the curve for MR and use it to find the monopoly output and price. (1 point) b) Calculate the output of a perfectly competitive market if the MC is the same as the market supply. Draw a picture of the demand, MR and MC, specifically labeling the answers in (a) and identify the welfare loss from monopoly in the picture. Also calculate the welfare loss from monopoly. (2 points) 2. An economy is currently made up of a firm that produces bread, a firm that produces butter, and a consumer who consumes both bread and butter. Current production is 100 units of bread, 50 units of butter which the consumed by the consumer. If the output changed to 75 units of bread and 60 units of butter, the profit of the butter firm would go up by \$42. The profit of the bread firm would go

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Unformatted text preview: down by \$76. The consumer prefers 75 bread and 60 butter to 100 bread and 50 butter. It is so much better that the consumer would pay \$40 more to have 75 bread and 60 butter rather than have 100 bread and 50 butter. Explain, using the definition, why you know it is not Pareto Efficient to have the economy produce 100 bread and 50 butter. (2 points) 3. A monopolistically competitive firm currently faces the following costs and demand for it’s product. Demand Q MC (\$) Q P (\$)-25.5 1 3 1 25 2 6 2 24.5 3 10 3 24 4 15 4 23.5 5 21 5 23 6 28 6 22.5 7 36 7 22 a) Find the firm output and price. (1 point) b) Find the firm profit from (a) if fixed costs are \$80. (1 point) c) Explain why (a) is not a LR equilibrium and why demand must change to get to a LR equilibrium. (1 point) d) If 4 is LR equilibrium quantity for the firm, find the price on the new demand curve for Q=4 and Q=3. (1 point)...
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HW5 11-18-09 - down by \$76 The consumer prefers 75 bread...

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