Assignment 3.

1.      Ville Furniture makes rocking chairs and sells them under conditions of monopolistic competition. The owner of the company has estimated its demand function as p = 18 - 0.2q, where p is in dollars and q represents the number of chairs sold per month. The company believes its monthly expenses vary with output according to the equation:

TC = 320 - 2q + 0.05q²

1. What is the marginal revenue function? What is the marginal cost function?
2. Determine the firm's short-run profit-maximizing price and output rate (please show your work).
3. Calculate total cost and total revenue at the profit maximizing price and output rate. How much profit will the firm earn at the profit maximizing price and output rate?
    
4. Suppose Ville's total fixed costs rise by 10%. Calculate the impact upon the firm's price, output and profits. How do you account for these results?

 

2. A US company sells industrial steel to both South Korea and Canada. Their economic division estimates the markets for these countries as given below

 

Using this information and applying the concept of price discrimination, answer the following questions.

1. What will be the price, revenues, and profits if the company does not discriminate between the two markets? Please show all work.  
2. If the company engages in price discrimination, what prices it will change in each of the submarkets. Why?
3. Compare and contrast the revenue, price, and profits between nondiscrimination and discrimination cases.

 

3. Define benefit (positive) and cost (negative) externalities.  Carefully explain how a cost externalities leads to an inefficient market outcome. What are possible solutions to the externalities problem?