Vous êtes sur la page 1sur 2

Econ

201 – Problem Set 3 (Due: Thursday October 19th in class)


Instructor: Min Sok Lee
TA: John van den Berghe

Question 1: Consumers, firms, partial equilibrium and intervention – [28 TOTAL POINTS]
On the demand side, the utility function of a representative consumer over two goods (𝑥, 𝑦) is given by
( *
𝑈 𝑥, 𝑦 = 𝑥 ) 𝑦 ) and let 𝑀 denote his income. On the supply side of good 𝑦, the cost function of a
-
representative firm is given by 𝐶 𝑦 = 𝑦 . . Let 𝑝0 and 𝑝1 be the corresponding prices of the two goods.
.
a) Find the consumer’s demand for good 𝑦. In other words, find 𝑦 2 𝑝1 while holding 𝑝0 and
𝑀constant. [6 points]
b) By solving the profit maximization problem, find the firm’s supply curve, 𝑦 3 𝑝1 . [4 points]
c) Calculate the partial equilibrium price 𝑝1∗ and quantity 𝑦 ∗ in the market for good 𝑦 where you only
have one representative consumer and one firm. [3 points]
d) The government is not happy with the equilibrium price and decides to set a price ceiling 𝑝15 . (i)
Should 𝑝15 be set above or below 𝑝1∗ ? Justify your answer [1 point] (ii) Draw the graph of the market
for good 𝑦 with the price ceiling. You do not have to be precise but capture the main features of the
demand and supply curves and the price ceiling. [3 points] (iii) Find the quantity of 𝑦 that will be
traded in the market and the profit level of the firm. [3 points] (iv) Find also the utility level of the
consumer with the price ceiling. [4 points]
e) By comparing the profit levels before and after the intervention, show whether the profits have
increased or decreased. [4 points]
Question 2: Supply curve – [20 TOTAL POINTS]
A firm has the following total cost function (i.e., after cost-minimization and adding fixed costs):
𝑇𝐶 𝑦 = 800 + 4𝑦 . .
a) Let p be the price of output y. Write down the profit function faced by the company. [2 points]
b) Assume your fixed costs of 800 have been committed (i.e., you signed the lease of the factory). You
are the manager of this company, and you recall from Varian that for profit maximization you need
𝑝 = 𝑀𝐶 𝑦 . If your goal is to maximize profits, what level of production would you choose for the
following output prices? 𝑝 = 80, and 𝑝 = 160. [4 points]
c) Would your decisions in part b) change if the fixed costs were not committed? In other words, they
are still fixed costs (i.e., are independent of y) but you have not yet signed the lease for the factory.
[5 points]
d) For the situation described in part c), derive formally the supply function of the firm. Use the same
structure we used in class and be specific about the range of p at which supply is zero and at which it
is positive. [5 points]
e) On the same graph, draw both the (inverse) supply function and the ATC curve. You don’t need to be
very precise, but capture the main features of the two functions. [4 points]



Question 3: Partial equilibrium with n firms – [12 TOTAL POINTS].
Your firm has a fixed cost of 𝐹𝐶 = 6, and total variable costs of 𝑇𝑉𝐶 𝑦 = 2𝑦 . . Your firm is considering
entering a new, foreign market that already has two firms operating (assume that these two firms are
identical to yours in their cost structure).
a) Find the industry supply curve assuming that you have entered this foreign market. [3 points]
-
b) The market demand curve is given by: 𝐷 𝑝 = 8 − 𝑝. Calculate the equilibrium price 𝑝 ∗ , equilibrium
B
quantities 𝑦C∗ (for all 3 firms), market equilibrium quantity 𝑌 ∗ , and firm profit level 𝜋C∗ . Will you decide
to enter the foreign market? Justify your answer. [5 points]
c) To be able to operate in this new foreign market, you need to pay for a business license fee. What’s
the highest amount that you would be willing to pay for the license? [4 points]
Question 4: Perfectly competitive market: the short and the long-run – [22 TOTAL POINTS].
( (
The production function of a firm is given by 𝑓(𝐾, 𝐿) = 𝐾 * 𝐿* and has no fixed costs (in the long run).
a) Assume that 𝑟 = 𝑤 = 10. Solve the cost minimization problem to find 𝐶 ∗ (𝑟 = 10, 𝑤 = 10, 𝑦). You
can assume that the SOCs are satisfied. [6 points]
b) Find 𝑀𝐶(𝑦). Assume that the market demand curve is given by 𝐷 𝑝 = 300 − 4𝑝 and there are 22
firms just like the one from part a) in this market/industry. Calculate the equilibrium price 𝑝 ∗ ,
equilibrium firm level quantity 𝑦C∗ , market equilibrium quantity 𝑌 ∗ , and firm profit level 𝜋C∗ . [6 points]
c) As we have done in class, in the short-run, we will assume that capital is fixed at a level 𝐾 = 10. Solve
the cost minimization problem at the firm level again to find 𝐶 ∗ (𝑟 = 10, 𝑤 = 10, 𝐾 = 10, 𝑦). [6
points]
d) On the same graph, draw 𝐴𝑇𝐶(𝑦), 𝐴𝑉𝐶(𝑦), 𝐴𝐹𝐶(𝑦), and 𝑀𝐶(𝑦). Also, draw the short-run supply
curve of the firm. [4 points]
Question 5: Government intervention: taxation – [18 TOTAL POINTS].
The cost function of a firm is given by 𝐶 𝑦 = 𝛼𝑦 where 𝛼 > 0 is a scalar. The market demand curve for
the good is 𝑦 2 𝑝 and you can it is continuous, decreasing in its price and positive for all positive prices.
a) Let’s start by finding the supply curve of the firm. You don’t need to do any math. Just think carefully
what the cost function looks like and find the optimal production levels for different price ranges. [5
points]
b) Assume that all firms in the market are identical. What’s the equilibrium price in this market? Fully
justify your answer. [4 points]
c) Similar to what we did in class, let’s now introduce a per unit tax 𝑡 imposed on the firms. At the new
equilibrium, what are the prices paid by the consumer and received by the firms? [3 points]
d) Did producer surplus increase or decrease? How about consumer surplus? In other words, who ends
up paying the tax? Explain the economic intuition behind your answers. [6 points]

Vous aimerez peut-être aussi