PS_2a-1 - Industrial Organization PS #2 Suggested Answers...

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Industrial Organization PS #2 Suggested Answers (1) The beer industry is competitive and a Staten Island Micro Brewery brews 10,000 bottles per year. Its average total cost is $0.50 per bottle. The market price for its beer is $2 per bottle. (a) What is the micro brewery’s marginal cost of production? (b) Is the market in a long-run equilibrium? Answer: a) On competitive markets firms maximize their profits when P=MC. Thus MC=$2 b) No, since they enjoy a profit (2) Suppose that competitive firm’s MC is given by MC(q)=3+2q. Assume that the market price of the firm’s product is $9. (a) What level of output will the firm produce? 9=3+2q à q=3 (b) What is the form’s producer surplus? 0.5*6*3=9 (c) Suppose that the average variable cost of the firm is given by AVC(q)=3+q. Suppose further that the firm’s fixed costs are known to be $3. Will the firm be earning a positive, negative or zero profit? Positive profit of $6 (3) Assume the labor market is competitive (i. .e., there is no monopsony)The labor
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This note was uploaded on 04/05/2012 for the course ECON UA.31 taught by Professor Storchmann during the Spring '11 term at NYU.

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PS_2a-1 - Industrial Organization PS #2 Suggested Answers...

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