Assignment

ECON 340 SPRING  2017 HW#4

Due: Wednesday, March 24, 2017

1.  Suppose Walter operates a local pharmacy in a perfectly competitive mar-

ket. His variable costs represent the costs of acquiring chemicals and can be expressed as T V C(Q) = Q² − ¹₃ Q. He has to refrigerate his chemicals, and the refrigeration cost $5 and is independent of the amount of chemicals he purchases on a specific day. In addition he has to rent his storefront, and he is contractually obligated to pay $50 regardless of whether he chooses to operate.

(a)   What are Walter’s sunk fixed costs? What are Walter’s non-sunk fixed costs?

(b)   Suppose the market price of pharmaceuticals is $20. How many phar-maceuticals will Walter produce?

(c)   Suppose the market price of pharmaceuticals is $5. How many phar-maceuticals will Walter produce?

2.  Consider the perfectly competitive market for coffee. In the short run, a coffee plantation has a cost curve of ST C(Q) = Q² + 4Q + 8. Assume that the fixed costs are non-sunk.

(a)   At what price would the plantation choose to shutdown?

(b)   What is the short-run supply curve for the coffee plantation?

(c)   Suppose that the market demand curve is Q^D = 450 − 3P and there are 40 coffee plantations in the market. What is the short-run equi-librium price?

3.  For each of these outcomes, explain whether it will be the long-run equi-librium

(a)   There are 20 firms each producing 10 units with T C(Q) = ¹₄ Q² − Q and P = 16

(b)   There are 100 firms each producing 1 unit with T C(Q) = ¹₃ Q³ −Q² + 3Q and P = 12

(c)  There are 100 firms each producing 2 units with T C(Q) = 3Q³ −

2Q² + Q and P = 10

4.  Consider the perfectly competitive labor market with labor demand L^D = 100 − 2W and labor supply L^S = 20 + 2W

(a)   Suppose the government implemented a minimum wage of $25. What is the impact on average wages and unemployment?

(b)   Show graphically the impact of imposing a minimum wage of $25 indicating the size of the deadweight loss

1

(c)   Is there a minimum wage the government could set that would not create a deadweight loss? Explain.