week 7 & week 8 problems and quiz- economics
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week_7_problem_sets_questions.docx
ECO 500: Week Seven Problem Sets
1. The widget industry is perfectly competitive. The industry demand and supply functions for widgets are given below.
Qd = 424 – 40P
a. What is the equilibrium price and quantity for the industry?
b. If the government establishes a price floor of $9, explain what will result in terms of excess demand or supply.
c. If the government establishes a price ceiling of $6, explain what will result in terms of excess demand or supply.
d. Assume the supply curve shifts to
Qs’ = 34 + 12P
What is the new equilibrium price and quantity?
e. Assume in addition to the supply curve shifting, the demand curve shifts to
Qd’ = 484 – 38P
What happens to equilibrium price and output?
2. Below is a table with total data for a firm in a perfectly competitive industry.
|
Quantity |
Total Cost |
|
0 |
100 |
|
10 |
220 |
|
15 |
300 |
|
20 |
360 |
|
25 |
450 |
|
30 |
600 |
|
35 |
770 |
|
40 |
960 |
a. What is the marginal cost and average total cost for the firm at each level of output?
b. If the prevailing market price is $34 per unit, how many units will be produced and sold? What are the profits per unit? What are total profits?
c. Is the industry in long run equilibrium at this price? If not, what do you expect to happen to price over time?
3. Jones Company operates within a monopolistically competitive industry. The estimated demand for its products is given by the following inverse demand function
P = 1760 – 12Q
It finance department has estimated its total cost function as
TC = 24,000 + 5 Q – 15 Q2 + 0.333 Q3
a. What is the level of output that maximizes short run profits? Hint: Profit is maximized when MR=MC
b. What is the profit maximizing price?
c. What are total profits?
d. What is the effect of an increase in fixed costs of $5000 on equilibrium price and output?
4. Ajax, Inc. is a monopolist. The estimated demand function for its product is
Qd = 120 – 0.8P + 12Y + 4A
Where Qd denotes quantity demanded, P denotes price, Y denotes personal income (in thousands of dollars), and A denotes advertising expenditures in hundreds of dollars.
Ajax’s marginal cost function is given as
MC = 21 + 4Q
Assume Y equals 3 and A equals 3 and fixed costs equal $1000
a. What is the inverse demand function? (The equation demand equation in the form P = a – bQd)?
b. What is the profit maximizing price and quantity of output for Ajax, assuming it is an unregulated monopoly? What are its profits?
c. If fixed costs increase to $1200, what will happen to equilibrium price and quantity?
