Despondent over the Red Sox's terrible season, Prof. Gruber decides to quit his day job and start a bicycle manufacturing firm in Kendall Square. As he starts looking into the bicycle manufacturing industry, he realizes it has some interesting features. First, he realizes that it operates as a competitive industry. Second, he finds that there are two technologies used by firms in the industry. Technology 1 uses solar power, and has a cost function

()=+4+32 for>0

Technology 2 uses electricity from the grid and is more efficient, with a cost function () = + 2+32 for>0

Assume that we are in the long run, so firms using both technologies can shut and leave the market at 0 cost, so that(0)=0 for both technologies.

Compute the marginal cost for technology 1.

()= ?

Compute the marginal cost for technology 2.

()= ?

Compute the average cost for technology 1.

()= ?

Compute the average cost for technology 2.

()=?

Derive the supply curve for each technology.

()= ?

()= ?

In the long-run, assuming that firms can choose their technology, what will happen? Choose the right answer

• The answer depends on firms' desired level of output
• Some firms will choose the solar technology (technology 1)
• No firms will choose the solar technology (technology 1)
• All firms will choose the solar technology (technology 1)

Now, suppose that the government of Massachusetts offers solar subsidies to 10 bicycle manufacturers. These subsidies are for $80 and the manufacturers receive these subsidies as long as they construct a bicycle manufacturing plant using the newly-invented solar technology (i.e. technology 1). Determine the new MC, AC, and supply curve for the solar technology with the subsidy.

()= ?

()= ?

()= ?