1. Domestic market demand for some good is described by: P = 100 - Q. Domestic supply is described by P = 20 + 2Q. Illustrate demand and supply. Find the equilibrium for this closed market.
a. Suppose that the commodity in question is available on the world market at a constant price of 10. If trade is unrestricted, what is the new equilibrium? How much do domestic producers lose if free trade is allowed?
b. Suppose there is a quota of 50 units allowed in. Illustrate this situation in a diagram. Is there any deadweight loss? Explain.
c. How can a domestic firm profit from this situation? Relate your answer to the diagram.
2. Suppose market demand for undifferentiated retail services is described by P =100-Q.
The well-understood technology of retailing makes it possible for anyone to set up a firm that can produce subject to TC = 10q with fixed costs small enough to be negligible.
a. Find the equilibrium price and quantity in the market. How large are the profits of a typical firm in the industry?
b. Suppose that one firm - Wal-Co - can produce subject to TC = 1 + Q + 0.5Q2.
Wal-Co's marginal costs are therefore given by 1 + Q. Illustrate the market with
Wal-Co participating. Does anyone make any profits? If so, how much?
3. Suppose that a firm's total costs are given by TC = 100 + 10Q + Q2. Its marginal costs are therefore given by MC = 10 + 2Q.
a. Find an expression for average costs (AC) and average variable costs (AVC). Graph them together with marginal costs.
b. Find the firm's short run supply curve. Is the whole curve relevant to the long run?
c. Describe the firm's production technology. If it raises its output, do its costs per unit rise or fall?