problemset7 - Middle East Technical University Department...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Middle East Technical University Spring 2011 Department of Economics ECON 201 Erol Çakmak TA: Osman Değer PROBLEM SET 7 1) A firm has a production function Q(K,L)= 4K 1/3 L 1/3 , where the unit prices of labor and capital are both equal to 1. P is the price of the product in a perfectly competitive market. a. Determine the long run supply function of this firm. b. What is the profit maximizing output level when P=3? c. Derive the short run supply function for K 0 =9. 2) Suppose the inverse demand function for cab rides in Chicago is given by P(Y)= 40000/Y where Y is the total number of cab rides in a given year. Assume that there are 100 identical cabs in this market, and that the cost function for each cab is given by C(y)= 200 + y 2 /2 where y is the number of rides per year produced by a typical cab and 200 represents the annual cost of a taxi license that is issued by the city (for simplicity, we assume away the cost of buying or renting a cab). a. Find the equilibrium price, if all cabs behave as if they operate in a perfectly competitive market. b. Is this equilibrium the industry s long run equilibrium, i.e. will cabs have an incentive to enter or exit at the equilibrium price derived in part (a) ? c. Now assume that, in an effort to raise revenue, the city raises the price of taxi licenses to $250 per year. i. How many cabs will be buying a license at the new price and offering rides in the
Background image of page 1

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

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 3

problemset7 - Middle East Technical University Department...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online