Market demand curve

1 True/false + explanations Please answer whether a statement is true or false and give a 1-2 sentence explanation of why this is the case. NO PARTIAL CREDIT WILL BE GIVEN IF YOU WRITE “TRUE” OR “FALSE” BUT DO NOT PROVIDE AN EXPLANATION.

1.1 Deadweight loss is always zero under perfect competition.

1.2 A factor market demand curve is the horizontal sum of the factor demand curves of the various firms that use the input.

1 1.3 Without government regulation every market would be perfectly competitive.

2 Short answers Please provide 2-3 sentences answering each question.

2.1 What is a potential problem that could arise when a government wants to regulate a monopsony with a minimum wage?

2 2.2 What is the shutdown condition and why is it important to check it?

2.3 Is price discrimination always bad for all consumers?

3 3 Multi-part problems Please answer all parts of the question. ALL QUESTIONS WILL BE WORTH THE SAME PERCENTAGE OF THE EXAM REGARDLESS OF THE NUMBER OF SUB-PARTS AND ALL SUB-PARTS OF A QUESTION WILL HAVE THE SAME VALUE.

3.1 Perfect competition question Imagine many small farms selling usb charging cables on a large online marketplace in a setting of perfect competition. Each individual firm faces costs C(q) = 2q 2 .

A. Derive a firm’s supply curve. Now assume there are 200 firms selling usb cables on the same large online marketplace.

B. Derive the market supply curve. Suppose the market demand curve is QD(p) = 1000 − 50p. C. What are equilibrium price and equilibrium quantity?

4 D. Graph the inverse demand and inverse supply curves for the market and indicate the equilibrium price and quantity.

E. What are consumer and producer surplus?

3.2 Price cap monopoly question Imagine a university called Bavis that is the monopoly in the market for economics degrees with cost-function C(Q) = 25Q2 + 360. Imagine the inverse demand function for economics degrees is p(Q) = 400 − 25Q. The government has decided it would ensure that there is no deadweight loss in this market for economics degrees by setting a price cap on Bavis.

A. What would be the equilibrium price and equilibrium quantity if the government did not impose a price cap and Bavis was able to operate as an un-regulated monopoly?

5 B. At what optimal price should the government cap economics degree sales?

C. What are the new post-price cap equilibrium price and equilibrium quantity?

D. What is Bavis’s new profit at the equilibrium?

E. Prove that this new profit level is a global maximum.

F. Show the new equilibrium price and equilibrium quantity graphically. Include 6 the original and regulated inverse demand curves firm’s marginal revenue curve and firm’s marginal cost curve.

G. What are consumer surplus producer surplus and deadweight loss at the equilibrium? How do they compare to the case of the un-regulated monopoly??

7 3.3 Price discrimination question Imagine Bavis continues to be the monopoly in the market for economics degrees though now with cost-function C(Q) = 15Q2 . And now the inverse demand function for economics degrees is p(Q) = 2000 − 10Q. The government no longer imposes a price cap on Bavis.

A. What are equilibrium price and equilibrium quantity?

B. Show the equilibrium price and equilibrium quantity graphically. Include the inverse demand curve firm’s marginal revenue curve and firm’s marginal cost curve. 8 Now assume that Bavis is able to perfectly price discriminate in the market for economics degrees.

C. What three conditions must be true for this perfect price discrimination to be possible?

D. What are the equilibrium prices and equilibrium quantity with perfect price discrimination?

E. What are consumer surplus producer surplus and deadweight loss at the perfect price discrimination equilibrium?

9 3.4 Monopsony question Now imagine that Bavis is a monopoly employer of labor in the city of Bavis. Suppose the firm faces an inverse supply curve of labor of w(L) = 40 + 12L.

A. What is the marginal expenditure curve for the Bavis? Now assume the monopsony has an inverse demand curve for labor of w(L) = 100 − 6L.

B. What are the equilibrium wage and labor quantity?

10 C. Show the equilibrium wage and equilibrium labor quantity graphically. Include the inverse demand curve and the firm’s supply and marginal expenditure curves.

D. What are Bavis’s surplus workers’ surplus and deadweight loss at the equilibrium?

11 3.5 Factor prices question Imagine Bavis is producing economics degrees following production function q(L K) = L 0.5K0.5 . In the short run capital is fixed at K¯ = 625. Bavis faces price p = 150 and can hire as many workers as it would like at a constant wage w = 75. Also Bavis’s fixed costs F are 0.

A. Find equilibrium labor (L ∗ ) and wages.

B. What are Bavis’s profits at this equilibrium?

12 C. Prove that this profit level is a global maximum.

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