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ECON 110
Problem Set 6 Solutions



Chapter 12: Problem 6
a. Calypso will produce 2 cubic feet a day and sell it for 6 cents a cubic foot.


Draw in the marginal revenue curve. It runs from 10 on the y-axis to 2.5 on the x-axis. The profit-maximizing output is 2 cubic feet at which marginal revenue equals marginal cost. The price charged is the highest that people will pay for 2 cubic feet a day, which is 6 cents a cubic foot.

b. Calypso will produce 3 cubic feet a day and charge 4 cents a cubic foot.


If Calypso is regulated to earn only normal profit, it produces the output at which price equals average total costat the intersection of the demand curve and the ATC curve.
c. The firm will produce 4 cubic feet a day and charge 2 cents a cubic foot.


If the firm is regulated to be efficient, it will produce the quantity at which price (marginal social benefit) equals marginal social costat the intersection of the demand curve and the marginal social cost curve.

Chapter 13: Problem 2
a. The price of a pair of running shoes falls in the long run.


Lite and Kool is earning an economic profit. This profit attracts entry into the market. As new firms enter, the demand for Lite and Kools shoes decreases. The decrease in demand leads to the price of running shoes falling.

b. The quantity of running shoes produced by Lite and Kool decreases in the long run.


Lite and Kool is earning an economic profit. This profit attracts entry into the market. As new firms enter, the demand for Lite and Kools shoes decreases. The decrease in demand leads to the quantity of running shoes produced by Lite and Kool decreasing.

c. Lite and Kool is earning an economic profit. This profit attracts entry into the market. As new firms enter, demand curves of each initial firm shift to the left. They decreases their output slightly, but the price also falls until it equals the average cost at the equilibrium quantity. Although these shoes are not identical, given the symmetry of the firms we can look at overall quantity in the running shoe market. Given that the price for each firm is lower in the long run, the quantity of running shoes in the market as a whole is likely to increase. Nevertheless, it is not so straightforward to aggregate across differentiated products.



d. Lite and Kool does not produce at the minimum of the average total cost in the long run.


Lite and Kool is a monopolistically competitive firm. In the long run, monopolistically competitive firms produce less output than the amount which minimizes the average total cost.

e. Price exceeds marginal cost by the amount of markup. In monopolistic competition in the long run, firm faces a downward sloping demand curve for its product, the quantity produced is less than the efficient scale and the firm has excess capacity.



Chapter 13: Problem 6
a. The price rises, output increases, and economic pro