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 C1(q)=q+4Q2+32 for q>0. Technology 2 uses electricity from the grid and is more efficient, with a cost function C2(q)=q+2Q2+32 for q>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 C(0)=0 for both technologies.

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.

E1)MC1(q)=

a) 1+4q+32/q

b)1+8q

c)1+2q-48/q

d)1+4q

e)None of the above

E2)AC1(q)=?

a)1+4q-48/q

b)1+2q-32/q

c)1+4q+48/q

d)1+2q+32/q

e)None of the above

E3)Q1(p)=?

a)1-p/8

b)p-1/8

c)1-p/16

d)p-1/16

e)None of the above

E4)The long run aggregate supply curve in this market (i.e. the total amount supplied by all firms as a function of price) depends on whether the price is less than 17.

For p<17, QS(p)=?

a)10/8(p-1)

b)1/4(p-1)

c)1/8(1-p)

d)1/4(1-p)

e)None of the above

E5)For p17, the long run aggregate supply curve cannot be expressed as a function of the above form. Why not?

a)Because the supply becomes infinitely inelastic

b)Because the supply becomes infinitely elastic

c)Because there is uncertainty in the model

d)None of the above

E6)Now suppose that the State of Massachusetts increases the number of solar bike manufacturing subsidies it will give from 10 to 100.

What is the new long-run price?

p=?

How much will be produced in total by firms with technology 1?

Q1=?

How much will be produced by total by firms with technology 2?

Q2=?

How many firms will there be with technology 1?

N1=?

How many firms will there be with technology 2?

N2=?

How much profit will be earned by each firm with technology 1?

1=?

How much profit will be earned by each firm with technology 2?

2=?