Industrial Organization: Contemporary Theory and Empirical Applications, 5th Edition

Answers to Practice Problems

Chapter 1

No Practice Problems in this chapter.

Chapter 2

2.1

1. Profit Maximization implies MC = 2q + 10 = P. Hence, q = (P − 10)/2.
2. With 50 firms, horizontal summation of the individual marginal cost curves yields: Q^S = 50 (P − 10)/2 = 25P − 250.
3. Equilibrium: P = $30 and Q = 500.
4. q = (P − 10)/2 = 10. Revenue = Pq = $300. Total cost = 100 + q² + 10q = $300. Profit = 0.

2.2

1. Inverse demand curve is: P = (6,000 − 9Q)/50. Hence, MR = 120 − (18Q/50) = 120 − (9Q/25).
2. MC = 10 + Q/25. Equate with MR to obtain: Q = 275. At this output, P = $70.50.
3. Total revenue = $19,387.50. Each plant produces 5.5 units and incurs a total cost of $185.25. Each plant earns a revenue of $387.75. Profit at each plant is $202.50.

2.3

1. Consumer surplus is the area of the triangle above the equilibrium price but below the demand curve = (1/2)($120 − $30)500 = $22,500. Producer surplus is the area of the triangle below the equilibrium price but above the supply curve = (1/2)($30 − $10)500 = $5,000. Total Surplus = $22,500 + $5,000 = $27,500. Note: Surplus is a marginal concept. Producer fixed cost is not considered.
2. Total surplus falls by area of deadweight triangle. Height of triangle is given by reduction in output which is 500 − 275 = 225. Marginal cost at Q = 275 is $21. Base of triangle is given by price less marginal = $70.50 − $21 = $59.50. So deadweight triangle has area equal to: = (1/2)($49.50)225 or $5,568.75. The new total surplus is the competitive surplus less the ...