ECN 303 Practice Problems for Ch.

Problem 8 in the textbook

8. a. We have P = 35 - 5Q and MC = AC = 5. Setting MR = MC, we find QM = 3 million chips

and PM = $20.

b. M = (20 - 5)(3) = $45 million

Consumer surplus = .5(35 - 20)(3) = $22.5 million.

Problem 10 in the textbook

10. a. To produce a fixed amount of output (in this case, 18 units) at minimum total cost, the firms
should set outputs such that MCA = MCB. This implies 6 + 2QA = 18 + QB, or QB = 2QA -
12. Using this equation together with QA + QB = 18, we find QA = 10 and QB = 8. The
common value of marginal cost is 26.

b. We know that P = 86 - Q, implying MR = 86 - 2Q. Marginal revenue at Q = 18 is 86 - (2)

(18) = 50. This exceeds either firm’s marginal cost (26); therefore, the cartel can profit by
expanding output.

c. Setting MR = MCA = MCB implies 86 - 2(QA + QB) = 6 + 2QA = 18 + QB. The solution is QA
= 13 and QB = 14. The cartel price is P = $59, and the common value of MR and the MCs is
32.

A firm has a patent on a drug. Its demand (price) equation is: P = 500 -0.2Q, and its long-run total
cost is: LTC = 0.6Q.

a. LAC =LMC=$0.6.

b. Set MR=LMC

500 – 0.4Q=0.6

Qm=1,248.5, Pm=$250.3, profit = (250.3 – 0.6)*1248.5 = $311,750.5

c. Pc=minLAC=$0.6, Qc=2,497.

d. DWL=1/2(250.3 – 0.6)(2497 – 1248.5)=$155,875.

A market consists of two firms, A and B, that decide to form a cartel. Their long-run total costs are:
LTCA = 6QA + QA^2 and LTCB = 19QB + 0.5QB^2.

a. Set LMCA=LMCB and QA+QB=14

QA=9, QB=5.
Note that LMCA=LMCB=$24.

b. Need MR= LMCA= LMCB.

MR=86 – 2Q=86 – 2(QA+QB)

Thus 86 – 2(QA+QB)=6+2QA

And 86 – 2(QA+QB)=19+QB

Hence, QA=13.25 and QB=13.50, Q=26.75

Note that LMCA=LMCB=$32.5,

and P=$59.25

c. π=R – LTCA – LTCB

= (59.25) (26.75) – [6(13.25) + (13.25)2] – [19(13.50) +0.5(13.50)2]

=$982.