Rilwan Dawodu 1a with no tax equilibrium values are Q = 140,000 - 25,000P Q = 20,000 + 75,000P demand supply

subtract supply from demand 0 = 120,000 -100,000P 100,000P = 120,000 P = 120/100 = 1.2 Q = 140,000 - 25,000(1.2) = 20,000 + 75,000(1.2) = 110,000 with no tax equilibrium values are Peq = $1.2 Qeq = 110,000 packs per day 1b with tax the 4 equations are Q = 140,000 - 25,000Pb demand Q = 20,000 + 75,000Ps supply Qd = Qs Pb - Ps = tax = 0.40 140,000 - 25,000Pb = 20,000 + 75,000Ps Pb = Ps + 0.40 140,000 - 25,000(Ps + 0.40) = 20,000 + 75,000Ps 120,000 - 10,000 = 100,000Ps 110,000 = 100,000Ps Ps = 1.1 Pb = Ps + 0.40 = 1.5 Q = 140,000 - 25,000Pb = 140,000 - 25,000*1.5 = 102,500 Q = 20,000 + 75,000Ps = 20,000 + 75,000*1.1 = 102,500 with tax the seller's price is Ps = $1.1 with tax the buyer's price is Pb = $1.5

with tax the quantity bought and sold is Q = 102,500 packs per day what portion of the tax is borne by buyers and sellers respectively? compared to the no tax equilibrium price P = $1.2 buyer's pay 1.5 - 1.2 = $0.30 more seller's receive $0.10 less ( 1.1 - 1.2 = - 0.10 ) $0.30 + $0.10 = $0.40 = tax 1c the deadweight loss from the tax is the area of the triangle (which is the sum of the 2 triangles) whose base is the tax and whose height is the difference in Q (Qeq - Qtax) 1/2 * 0.40 * (110,000 - 102,500) = $1500 per day the deadweight loss from the tax is $1500 per day 1d the tax revenue generated is tax * quantity = 0.40 * 102,500 = $41,000 per day 2a If there were no imports, domestic equilibrium P and Q would be P = 100 cents per pound Q = 50 million pounds P = 50 + Q supply P = 200 - 2Q demand subtracting 0 = - 150 + 3Q Q = 150/3 = 50 P = 50 + 50 = 100 the world price is Pw = 60 cents per pound the tariff of 40 cents per pound would raise the price of imports to 100 cents per pound which equals the domestic equilibrium price with no imports Therefore there will be no imports and the domestic equilibrium price of 100 cents per pound 2

will be the domestic price of hula beans if the tariff is imposed 2b the domestic quantity demanded without the tariff is P = 200 - 2Q demand where P = 60 60 = 200 - 2Q -140 = -2Q Q = 70 consumer surplus is reduced by the amount (40 cents per pound )(50 million pounds) = 2000 million cents + 1/2 * (70 - 50)million pounds * 40 cents per pound = 400 million cents = 2400 million cents = $24 million consumer surplus is reduced by $24 million the domestic quantity supplied without the tariff is P = 50 + Q supply where P = 60 Q = 60 - 50 = 10 million pounds producer surplus is increased by 10 million pounds * 40 cents per pound = 400 million cents + 1/2 * (50 - 10)million pounds * 40 cents per pound = 800 million cents = 1200 million cents = $12 milllion producer surplus is increased by $12 milllion the change in total surplus (producer + consumer) is minus $12 milllion total surplus is reduced by $12 milllion Since the import price with tariff, 100 cents per pound, equals the domestic equilibrium price without imports, there are no imports and thus the government revenue from the tariff is $0

3a The monopoly operates where MR = MC MR = 28 - 0.0016Q MC = 0.0012Q 28 - 0.0016Q = 0.0012Q 28 = 0.0028Q Q = 10,000 P = 28 - 0.0008Q P = 28 - 0.0008*10,000 P = 28 - 8 P = 20 unregulated firm will operate at P = 20 Q = 10,000 3b The price and quantity that would be most socially efficient is the competitive equilibrium price and quantity where MC = P This is because at the competitive equilibrium price and quantity, total surplus, producer plus consumer surplus is greatest. As seen in the diagram in 3c, the monopolist's higher P and lower Q result in a deadweight loss, reducing total surplus from the competitive equilibrium level P = 28 - 0.0008Q MC = 0.0012Q MC = P 0.0012Q = 28 - 0.0008Q 0.002Q = 28 Q = 14,000 P = 28 - 0.0008*14,000 P = 16.8 P = 16.8 Q = 14,000

3c

4 MC1 = 20 + 2Q1 MC2 = 10 + 5Q2 First find the MCtotal = MCt curve which is the horizontal sum of the 2 MC curves let MC1 = MC2 = MC and solve for Q1 and Q2 above Q1 = MC / 2 - 10 Q2 = MC / 5 - 2 Qt = Q1 + Q2 = MC / 2 + MC / 5 -12 10Qt = 7MC - 120 MCt = 120/7 + 10/7 Qt set MCt = MR to solve for Qt P = 20 - 3Q R = PQ = 20Q - 3Q^2 MR = 20 - 6Q MR = MCt 20 - 6Q = 120/7 + 10/7 Q 140/7 - 42/7 Q = 120/7 + 10/7 Q 20/7 = 52/7 Q Q = 20/52 = 10/26 = 5/13 5

Q = 5/13 MR = 20 - 6Q MR = 20 - 30/13 P = 20 - 3Q P = 20 - 15/13 solve for Q1 and Q2 from MR = MC1 20 - 30/13 = 20 + 2Q1 Q1 = - 15/13 MR = MC2 20 - 30/13 = 10 + 5Q2 Q2 = 2 - 6/13

Q1 = - 15/13 Q2 = 2 - 6/13 = 1.54 P = 20 - 15/13 = 18.85 Q = Q1 + Q2 = 5/13 should not be a negative value for Q1 5 Set the MR curve for each demand curve equal to MC = $10 and solve for each Q and P MRb = MRp = MC = 10 Pb = 70 - 0.0005Qb Pp = 20 - 0.0002Qp MRb = 70 - 0.001Qb MRp = 20 - 0.0004Qp 10 = 70 - 0.001Qb Qb = 60,000 Pb = 70 - 0.0005*60,000 = 40 6

10 = 20 - 0.0004Qp Qp = 25,000 Pp = 20 - 0.0002*25,000 = 15 The prices are not optimal Optimal prices are Pb = 40 Pp = 15 6a The monopolist maximizes profit with the condition MR = MC here MC = 0 R = PQ = 1200Q - Q^2 MR = 1200 - 2Q MR = MC is 1200 - 2Q = 0 Q = 1200/2 = 600 P = 1200 - Q = 1200 - 600 = 600 For monopolist Q = 600 P = 600 6b P = 1200 - Q Firm 1's total revenue is R1 = PQ = ( 1200 - Q )Q1 = 1200Q1 - (Q1 + Q2)Q1 = 1200Q1 - Q1^2 - Q2Q1 MR1 = 1200 - 2Q1 - Q2 set MR1 = MC = 0 and solve for Q1

1200 - 2Q1 - Q2 = 0 Q1 = 600 - Q2 / 2 this is firm 1's reaction curve in the same way firm 2's reaction curve is Q2 = 600 - Q1 / 2 solving for Q1 and Q2 Q1 = 600 - (600 - Q1 / 2) / 2 Q1 = 300 + Q1 / 4 4Q1 = 1200 + Q1 3Q1 = 1200 Q1 = 400 Q2 = 600 - Q1 / 2 = 600 - 200 = 400 level of output produced by each firm in a Cournot duopoly in the long run is Q1 = Q2 = 400 (P = 1200 - 800 = 400) 6c For perfect competition set P = MC = 0 P = 1200 - Q = 0 long run output and price for perfectly competitive industry Q = 1200 P=0 revenue = profit = 0 7 Qm = 140,000 - 32,000P Qf = 60,000 + 8,000P

market demand competitive fringe supply

Dd is the dominant firm's demand curve relating Qd to P

Qd = market demand - competitive fringe supply = Qm - Qf = dominant firm's output Qd = 140,000 - 32,000P - (60,000 + 8,000P) Qd = 80,000 - 40,000P P = 2 - 0.000025 Qd dominant firm's demand curve dominant firm's demand curve

Rd = Qd*P = 2Qd - 0.000025 Qd^2 MRd = 2 - 0.00005 Qd set MRd = MCd 2 - 0.00005 Qd = 0.75 Qd = 25,000 = dominant firm's output for Qd = 25,000 find P on the dominant firm's demand curve P = 2 - 0.000025 Qd = 2 - 0.000025 * 25,000 = $1.375 at P = $1.375 the market output is Qm = 140,000 - 32,000P market demand Qm = 140,000 - 32,000*1.375 Qm = 96,000 = market output output of the competitive fringe at P = $1.375 is Qf = 60,000 + 8,000P competitive fringe supply Qf = 60,000 + 8,000*1.375 = 71,000 Qf = 71,000 = competitive fringe supply check Qd = market demand - competitive fringe supply = Qm - Qf Qd = 25,000 = 96,000 - 71,000 = 25,000 8a Q = 1800 - 200P MR = 9 - 0.01Q dominant firm's MR curve

MC = $1.50 perfect competition set MC = P Q = 1800 - 200P 200P = 1800 - Q P = 9 - 0.005 Q (MR = 9 - 0.01Q) P = 9 - 0.005 Q = 1.50 = MC Q = (9 - 1.5 ) / 0.005 = 1500 Q = 1500 P = $1.50 consumer surplus from the demand curve when Q = 0 P = 9 consumer surplus = 1/2 * (9 - 1.5) * 1500 = $5625 producer surplus MC = constant = 1.5 = horizontal supply curve willing to sell any amount at P = $1.5 producer surplus = 0 8b pure monopoly set MC = MR MC = 1.5 = 9 - 0.01Q = MR Q = (9 - 1.5) / 0.01 = 750 P = 9 - 0.005 Q = 9 - 0.005 (750) = $5.25 pure monopoly Q = 750 P = $5.25 consumer surplus

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from the demand curve when Q = 0 P = 9 consumer surplus = 1/2 * (9 - 5.25) * 750 = $1406.25 producer surplus MC = constant = 1.5 = horizontal supply curve willing to sell any amount at P = $1.5 producer surplus = (5.25 - 1.5) * 750 = $2812.5

8c perfect price discrimination quantity is sold until P = MC P = 9 - 0.005 Q = 1.50 = MC Q = (9 - 1.5 ) / 0.005 = 1500 Q = 1500 Price is variable along the demand curve all prices are charged where P = 9 - 0.005 Q and 0 < Q =< 1500 consumer surplus is 0 every customer pays maximum they're willing to pay firm captures all consumer surplus from the demand curve when Q = 0 P = 9 profit is 1/2 (9 - 1.5) 1500 = $5625

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