ECON 415

Firms, Markets and Industry Structure

Homework assignment # 2: answers

Problem 1 page 43

a) Setting inverse demand function equal to the inverse supply function, we obtain the equilib-
rium quantity. The inverse demand function is

P = 1000 − 0.025Q,

and the inverse supply is

P = 150 + 0.033Q.
Thus

1000 − 0.025Q = 150 + 0.033Q

Q = 14655.172

The price is found by substituting Q into the inverse demand or supply equation

P = 1000 − 0.025 × 14655.172

P = 633.6207

b)
1 536935.16
CS = (1000 − 633.6207)(14655.172) = = 2684675.83
2 2
1 7087544.5
PS = (633.6207 − 150)(14655.172) = = 3543772.27
2 2

Problem 2 pages 43

Before forming the supply association, the industry price is given by P c = M C. The quantity
supplied is Qc where price equal to MC. here are no profits and consumer surplus is equal to
the area adP c . After forming the association and restricting supply, the price rises to P M . The
quantity is QM . Producers now have profits equal to the area P c cbP M while CS falls to abP M .
The deadweight loss is equal to the area bcd.

Problem 3 pages 43

a) We set price equal to MC for any of the firms to obtain

M C = 4q + 2 = P
4q = P − 2
P −2
q =
4

1
 p

b
PM

c d
Pc=MC

Qc q
QM

Figure 1:

2
 b) Because they are 100 identical firms, we can simply multiply the supply curve in part a by
100 as follows to obtain the supply equation
Q = 100q
P −2
Q = 100( )
4
25P − 50
We then solve this equation for P as a function of Q to get inverse supply
Q = 25P − 50
Q + 50 = 25P
Q
P = +2
25

Problem 4 pages 43

a) First find the inverse demand function by solving the demand equation for P as a function
of Q
Q = 1000 − 50
Q
P = 20 −
50
Then set this equal to MC to find the competitive solution. This will give
P = MC
Q
20 − = 10
50
Q
= 10
50
Q = 500

500
P = 20 −
50
P = 10
Under monopoly we set MR equal to MC. We find MR by finding TR first and taking the derivative
with respect to Q.
Q
P = 20 −
50
Q
T R = P Q = (20 − )Q
50
2
M R = 20 − Q
50
Setting this equal to MC we obtain
MR = MC
2
20 − Q = 10
50
Q = 250
250
P = 20 −
50
P = 15

3
 b) First compute the elasticity for the competitive case where Q = 500 and P = 10.

P
ε = − Q0 (P )
Q
10
= − (−50)
500
= 1

Then compute the elasticity for the monopoly case when Q = 250 and P = 15
P
ε = − Q0 (P )
Q
15
= − (−50)
250
= 3

c) The monopoly price is P = 15. MC for the firm is M C = 10. So we obtain

P − MC 15 − 10 1
= =
P 15 3
and
1 1
=
ε 3

Problem 5 page 44

a) To find the competitive quantity we set price equal to MC and solve for Q as follows.

P = MC
Q
3− = 1
16000
Q = 32000

We obtain price by substituting the competitive quantity in the inverse demand function.
Q
P = 3−
16000
32000
P = 3− =1
16000
Or we could simply note that with P = M C, price must be equal to 1, and then substitute this in
the inverse demand equation and solve for Q.

b) With an inverse demand of P = 3 − Q/16000, MR is given by M R = 3 − Q/8000. Setting

this equal to MC will yield the monopoly value of Q.

MR = MC
Q
3− = 1
8000
Q = 16000

Solving for price we obtain

Q
P =3− =2
16000

4
 c) See the following graph
The competitive industry has no profits and so producer surplus is 0. CS is given by the triangle
that starts at 1, proceeds over to c, and then angles up to 3.
1
CS = (32000)(2) = 32000
2
With a monopoly a CS is given by the triangle that starts at 2, proceed over to a and then
angles up to 3.
1
CS = (16000)(1) = 8000
2
Profit or producer surplus for the monopolist are given by the rectangle beginning at 1, pro-
ceeding over to b, up to a and then back over to 2.

P S = 16000

So total surplus with monopoly is 24000. The loss from monopoly is then 32000-24000=8000.

One can also compute the area of the DWL triangle abc.

a
2

b c
1

Qc q
QM