hw7soln - PADP 6950 Fail 2011 Fertig UGA Homework '7...

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Unformatted text preview: PADP 6950 Fail 2011 Fertig UGA Homework '7 Solutions 1. Consider the market for solar power. Assume the market is perfectly competitive and initialiy in long—run equilibrium; solar power sells for $.25 per kwh [kilowatt hour, a unit ofpower). a. Draw one supply and demand graph to represent the market (producing Q). Draw one graph to represent a single firm [producing q), with ATC, MC, and demand. The single firm’s demand curve is a horizontal line at the market price P. g” P Jam Ma ' ' :‘LLLFN.fl.._.-.._m__w_. .3 M Ra ( .' i l . Q0 Q? Q2. %0%{ (6;; b. Next, to encourage conservation, Congress taxes all forms of energy EXCEPT . solar power. Show what happens to the market and the firm in the short run; indicate cleariy what happens to price, quantity, and profit. A tax on other forms of energy will shift out the demand curve for solar power. 9 The market quantity will rise to Q1. 9 The price will price to P1. 9 Each firm will respond to the price increase by producing more q, which will rise to q1. 9 The firm’s profit will increase from 0 (long~run equilibrium profit in competition is always 0) to a positive number. c. What happens to the market and the firm in the long run? Indicate clearly what happens to price, quantity, and profit. Because the firms are earning profit, new firms will enter the market to capture some profits, causing the supply curve to shift out. 9 The price will return to the long-run equilibrium price of $0.25. 9 Each firm competes with the new firms and must return to a production level (.1 where they are at minimum ATC. So firms return to the original qt). 9 The market quantity will rise to Q2. Each firm is producing (30, but there are more firms now. 9 A new equilibrium will arise such that each firm is earning 0 profits again. 2. Professor Bong has just written the first textbook in Punk Economics. it is called Up Your isoquant. Market research suggests that the demand curve for this book wiil be P=20-Q/100. As a result, the marginal revenue function is MR=20-Q/50. It will cost $1000 to set the book in type, which is necessary before any copies can be printed. In addition to the setup cost, there is a marginal cost ofilisL per book for every book printed. a. What is the profit—maximizing price and quantity? Step 1: MR=MC Step 2: plug Q into demand equation to get P 20-Q/5024 P=20-Q/100 20-4=Q/50 P220~8 Q=16*50 P=12 b. What profit will this textbook generate? Profit = (P-ATC)*Q ATC[at Q=800] = (1000+4*800 800 = 5.25 Profit = (12 - 5.25)*800 z :5. Now assume that there is demand for this text in Canada. The demand function for Canada is leS'Q/SO. The resulting MR is 15—Q/25. The marginal cost is the same and the'setup cost does not need to be paid again to seli in Canada. ifthe publisher can charge a different price in each country and wants to maximize profits, how many copies should it sell in the US and in Canada? What will the prices be for each country? What will its total profit be? Step 1: MR=MC for Canada Step 2: plug Q into demand equation to get P 15-Q/25=4 P=15-275 50 15-4=Q/25 211*25 The price and quantity in the US will be the same as above since the firm can price discriminate. Total = [from + Pcanadananada ““ 4*Qcanada Profit 3 5400 + 95*275 - 4*275 Profit = 6912.50 ...
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This note was uploaded on 01/18/2012 for the course PADP 6950 taught by Professor Fergi during the Spring '11 term at University of Georgia Athens.

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hw7soln - PADP 6950 Fail 2011 Fertig UGA Homework '7...

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