9781118041581

Answers to Odd-Numbered Problems 13

Setting QDQSimplies 1,000 20P 15P. Thus, we find P $28.57

and Q 428.57. At QF42.86, each firm’s AC is $21.3. Thus, its

profit is: (28.57 21.3)(42.86) $311.6.

c. In long-run equilibrium, P min AC $20. In turn, Q 1,000 

(20)(20) 600. The number of firms is: 600/30 20.

9. a. Here, MC AC $5. Thus, PC$5. From the price equation, 5 
   35 5Q, implying QC6 million chips.
   b. The industry displays constant returns to scale (constant LAC). The
   real microchip industry probably displays increasing returns to scale
   (declining LAC). For competition to be viable, returns to scale must
   be exhausted at volumes well below total market demand.
   c. Total profit is zero. Consumer surplus is (.5)(35 5)(6) $90 million.


10. a. Equating 70 Q and 40 2Q, we find Q 10 and P $60.
    b. Now we use 70 Q  25 2Q to find Q 15 and P $55. The
    subsidy has increased output and (consequently) reduced price.
    c. While the subsidy helps producers and consumers, it is not “free.”
    Taxpayers must finance the cost of the subsidy. Economists note that
    subsidies can lead to inefficient outcomes, encouraging output past
    the point at which MB MC.

Chapter 8

1. a. The merger should mean the end of the prevailing cutthroat
   competition. The merged firm should set out to achieve the available
   monopoly profit.
   b. Formerly, cutting rates made sense in order to claim additional clients
   from one’s rival. After the merger, the newspapers will raise rates
   (again seeking the monopoly level).


2. Packing the product space with a proliferation of differentiated items is a
   classic example of strategic entry deterrence. The slower selling brands are
   not profitable in themselves. However, they raise the firms’ overall profits
   by leaving no product niche for a new rival to profitably enter the market.


3. a. We know that P  11 Q and C  16 Q. Setting MR MC, we have
   11 2Q 1. Thus, the monopolist sets QM5 million and PM$6.
   b. The regulator sets P AC. Thus, 11 Q 16/Q 1. After
   multiplying both sides by Q, this becomes a quadratic equation with
   two roots: Q 2 and Q 8. Naturally, the regulator selects the larger
   output level, so we have QR8 million and PR$3.
   c. Under marginal cost pricing, P* MC $1 and Q  11 P  10
   million. At this quantity, AC is 26/10 $2.60. The shortfall of price
   below average cost is 2.60  1 $1.60 per unit.

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