Consider the following three statements in connection

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Consider the following three statements in connection to a perfectly competitive market which is in equilibrium. For each of the statements tell me whether they are TRUE, FALSE or UNCERTAIN. Please, briefly clarify (only) if you answer UNCERTAIN. (a) In the short run firms may be profitable or loss-making (b) In the long run all firms make zero profits (c) There is no excess demand or excess supply, both in the short run or in the long- run
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2 PART 2: TWO SHORT-ANSWER QUESTIONS [20 marks each] Question 2-1 In this question consider a monopolist for UVic sweaters with cost function . 275 5 . 0 ) ( 2 + = Q Q C Here Q represents the numbers of sweaters sold. 1 (a) (1) Formulate the monopolist’s problem in case demand were given by . 60 P Q = (2) Compute the monopoly price and quantity. (3) Show the solution to the monopolist’s problem in a graph and indicate what represents the consumer surplus and the producer surplus. (b) In reality the monopolist sells to UVic personnel and UVic students. Demand by UVic personnel is given by A A P Q = 55 , and UVic student demand is given by B B P Q 2 70 = . (1) In case the monopolist can divide up the market into these two segments, how many sweaters would the monopolist sell to UVic personnel and how many to UVic students? (2) What exact assumption about the cost of arbitrage must you make in order to make third-degree price discrimination work? 1 Right! This monopolist is actually the UVic book store.
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3 Question 2-2 The government of a country called “Regula” currently promises its 10,000 wheat farmers a price of P=20 per bushel of wheat. The government currently does not allow new farmers to start growing wheat and makes sure that Regula does not import or export wheat. The (short-run and long-run) cost function of each farm in Regula is . 200 4 2 ) ( 2 + = i i i q q q C Here q i is the farm’s output in bushels of wheat. Aggregate demand for wheat is given by Q = -10,000P + 400,000 . A UVic economics student that worked for a coop term at the Regula government advises to allow farmers to produce wheat under competitive circumstances. In this question you investigate what would happen according to this proposal. [Assume that Regula stays a closed economy, i.e. assume there will be no import or export of wheat.] (a) Clarify what the proposal of the coop student means in practical terms. (b) Compute the current supply (at the price P=20 ) of wheat produced in Regula. (c) Compute the price per bushel of wheat immediately after the proposal of the coop student gets implemented (i.e. in the short run) (d) Compute the price per bushel of wheat in the long run if the proposal of the coop student gets implemented. <end of quiz>
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Economics 203, Fall 2006 Intermediate microeconomics Instructor: Paul Schure ANSWERS QUIZ 3 Question 1-1 (a) TRUE (b) TRUE (c) TRUE In this question and the next +2 for correct answers, -1 for wrong answers, 0 for unanswered answers or UNCERTAIN with a reasonable story.
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