BC32203Ekonomi Industri

“Industrial Economics”

Practice Questions

3

Quantity

$/unit

Demand

Competitive Supply

PC

QC

The demand curve measures the willingness to pay for each unit

Consumer surplus is the area between the demand curve and the equilibrium price

Consumer surplusThe supply curve measures the

marginal cost of each unit

Producer surplus is the area between the supply curve and the equilibrium price

Producer surplus

Aggregate surplus is the sum of consumer surplus and producer surplus

Equilibrium occurswhere supply equals

demand: price PC quantity QC

Equilibrium occurswhere supply equals

demand: price PC quantity QC

Efficiency and surplus: illustration

The competitive equilibrium is efficient

Problem 6:Assume the market for oil is perfectly competitive, with the following market demand and supply curves:QD = 100 – PQs = -50 + 2P

a. Find the equilibrium price and quantity for this market.b. Calculate consumer and producer surplus in the competitive equilibrium.

Problem 6:a. Set QD = QS. 100 – P = -50 + 2P; 3P = 150; Pe = 50; Qe = 50 b. Consumer Surplus = ½ (100-50)*50 = 1250Producer Surplus = ½ (50-25) * 50 = 625

Problem 6:Assume the market for oil is perfectly competitive, with the following market demand and supply curves:QD = 100 – PQs = -50 + 2Pa. Find the equilibrium price and quantity for this market.b. Calculate consumer and producer surplus in the competitive equilibrium.

Problem 8:

Problem 8:a. MR = 55 – 4Q b. set MR = MC; 55 – 4Q = 2Q – 5; Q = 10; P = 55 – 2(10) = 35 c. Profits = 35(10) – [102 – 5(10) + 100] = 350 – 150 = 200 d. Consumer Surplus is shown graphically in Figure 3A.1 as triangle area ABCConsumer Surplus = ½ (55-35) (10) = 100  e. P = MC; 55-2Q = 2Q – 5; Q = 15; P = 25 f. Profits under perfect competition = 25(15) – [152 – 5(15) +100] = 375 – 250 = 125 Consumer Surplus under perfect competition is shown graphically in Figure 3A.1 as triangle area AEG. Consumer Surplus = ½ (55-25) *15 = 225

g. Deadweight Loss is shown graphically in Figure 3A.1 as the triangle BEF. Deadweight Loss = ½ (35-15) * (15-10) =50

FIGURE 3A.1

Problem:Consider a market in which the demand curve is given by: P = 300 - QTotal costs for the industry is given by TC = 20Q. (Hint: what does this imply aboutmarginal cost)1.1 : What is the competitive price? What are industry profits? (Hint: what is thesupply curve in a competitive industry?)1.2 : Represent your answers in 1.1 in a graph and shade the area of consumersurplus, producer surplus and any efficiency loss for the market structure.1.3 : What is the monopoly price? What are profits?1.4 : Represent your answers in 1.2 in a graph and shade the area of consumersurplus, producer surplus and any efficiency loss for the market structure.1.5 : Calculate the Lerner Index.

• The elasticity of demand ε is a characteristic of the demand curve.

• The profit-maximizing condition for the monopoly could be written as follows:

where the left-hand side is the price-cost margin (aka Lerner Index): the difference between price and marginal cost as a fraction of price.

N.B. Note that the higher the elasticity of demand, the closer is the monopoly price to the competitive price.

Profit Maximization of a Monopoly Firm

1

p

MCp

Thank You!