Economics 208 Fall Semester 2016 Assignment 3 Due Date: November 7 in class Be sure to explain your answers. A grade of zero is applied to unexplained answers. 1. Should a competitive firm ever produce when it is making losses? Why or why not? 2. Suppose there are 100 firms in a perfectly competitive industry. Suppose that an individual firm's cost function is given by . (a) Determine an individual firm's short-run supply curve. (b) Determine the industry supply curve. (c) Suppose the market demand curve for the product is given by . What are the market equilibrium price and quantity and the equilibrium quantity produced by each firm? (d) Is the firm making profits or losses in the short run? Explain. (e) Illustrate the short-run equilibrium for a representative firm and the industry. (f) Derive the consumers and producers surpluses at the equilibrium. (g) Explain what you would expect to happen to price and output in this industry as we move to the long run. (h) Determine the equilibrium price, quantity per firm, market quantity, and number of firms in the long run. 3. The inverse demand curve a monopoly faces is P = 100 – Q. The firm's cost curve is C(Q) = 10 + 5Q. (a) What is the profit-maximizing level of output and price? (b) Compare the monopoly outcome to that of perfect competition. (c) Determine how much consumers are harmed by monopoly relative to perfect competition (i.e. determine the change in consumer surplus). (d) Determine the deadweight loss of monopoly. 4. Firms in perfect competition have no market power and set price equal to marginal cost. A monopolist has market power and sets price above marginal cost. Market power is measured by the ability to set price above marginal cost. Show and explain how market power is affected by the price elasticity of demand. 5. A monopoly sells its good in Canada, where the elasticity of demand is -2, and in Japan, where the elasticity of demand is -5. Its marginal cost is $10. At what price does the monopoly sell its good in each country if the monopolist is able to price discriminate? 6. Lennoxville is about to open a new amusement park. The town figures that each person will take rides. The marginal cost of a ride is essentially zero. If the town uses a two-part tariff, determine the profit maximizing admission fee and charge per ride. 7. Illustrate and explain the short-run equilibrium for a firm in monopolistic competition that is making negative profits. Explain what happens to the firm's demand function and profits as we move to a long-run equilibrium.