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# Read these instructions carefully! Carefully answer each of the questions below.

You can write or type your answers for the questions EXCEPT ANY GRAPHS MUST BE COMPLETED BY HAND (NOT USING THE DRAWING TOOLS IN WORD OR ANY OTHER PROGRAM). Please put your name and PSU ID number at the top of the 1st page. You may use as many sheets of paper as you need. When you are finished, scan your entire document (including the parts you typed and the parts done by hand). Save the file on your computer (.PDF format preferred) and then upload it to the ANGEL drop box for this homework assignment. ________________________________________________________________________

1. (25 total points). You are given the following information about the costs of a perfectly competitive firm. Quantity 0 1 2 3 4 5 6 TFC 45 45 45 45 45 45 45 TVC 0 20 35 45 75 120 180

You are hired to determine the profit-maximizing quantity of the firm for different market prices. Complete the table below. Market Price \$14 \$18 \$44 \$53 \$70 Profit-maximizing level of output 1 3 4 5 6 Total Revenue 14 54 176 265 420 Total Cost 65 90 120 165 225 Profit -51 -36 56 100 195

2. (14 points) The short-run supply curve of a perfectly competitive firm is the firms marginal cost curve. Carefully explain the two exceptions to the statement above. For one, the short run supply curve of a competitive firm is only part of the marginal cost curve. The part of this curve is the section that is above the graphs average variable cost curve. Essentially in the short run, a competitive firm will produce an output that creates a perfect output that matches the marginal revenue. Because this short run supply curve makes the perfect marginal revenue curve, this creates the equal marginal cost curve since marginal revenue is equal to marginal cost.

3. (21 points) Suppose that, in a perfectly competitive market at the profit-maximizing quantity, the market price is greater than average total cost. Carefully explain what will happen to the number of firms, the market supply, and the price of the good as we move from the short run to the long run. If we are going from a short run situation to a long run situation and the market price is greater than average total cost, a few things will happen. First the number of firms will increase. More firms will boldly enter into a market where the price is greater than average total cost, implying there is a major space for economic gain. As more firms enter the market, this will cause an increase in market supply. This is due to a larger number of producers making a product or service. However, as more product is available on the market, the demand for the product will decrease, causing the price of the good to decrease as well.

4. (40 total points) Suppose a monopolist faces the following demand curve: P = 596 6Q. Marginal cost of production is constant and equal to \$20, and there are no fixed costs. a) (8 points) What is the monopolists profit-maximizing level of output? 20 = 596 12Q Q = 48 units b) (8 points) What price will the profit-maximizing monopolist charge?

P = 596 6(48) P = \$308 c) (8 points) How much profit will the monopolist make if she maximizes her profit? \$14,784

d) (8 points) What would be the value of consumer surplus if the market were perfectly competitive? CS = (308-48) x 96/2 CS = 12,480

e) (8 points) What is the value of the deadweight loss when the market is a monopoly? DWL = (308-48) x (96-20)/2 = 9880