Question 1

Imagine that you have been given a job as an economic advisor to evaluate a certain competitive US manufacturing industry. Your (accurate) statistical analysis indicates the market is characterized by demand of Q_d = 150 - 3P and supply of Q_s = 2P -10.

• Solve for equilibrium price P₁ and quantity Q₁.
• Depict the supply curve S₁ and demand curve D₁ on the usual P, Q diagram. Label all relevant intercepts (including two intercepts for the demand curve and one intercept for the supply curve). Clearly indicate and label the market equilibrium.
• Graphically indicate the areas of Consumer Surplus (CS₁) and Producer Surplus (PS₁).
• Compute the values of Consumer Surplus (CS₁) and Producer Surplus (PS₁), clearly indicating the units that CS and PS are measured in.

Question 2

Continuing your analysis of the competitive US manufacturing industry from Question 1, with demand of Q_d = 150 - 3P and supply of Q_s = 2P - 10, suppose a temporary supply shock due to higher energy prices causes the supply curve to decrease, shifting the curve up by $10 for every given quantity Q.

• Determine the new supply equation. (Hint: What approach have you used to model taxes and subsidies in previous assignments?)
• Solve for equilibrium price P₂ and quantity Q₂.
• Depict the original supply S₁, the new supply S₂, and the original demand D₁on the usual P, Q diagram. Label all intercepts (including two intercepts for the demand curve and one intercept for the supply curve). Clearly indicate and label the new market equilibrium.
• Graphically indicate the areas of Consumer Surplus (CS₂) and Producer Surplus (PS₂) that resulted from the new market equilibrium.
• Compute the values of Consumer Surplus (CS₂) and Producer Surplus (PS₂) associated with the new market equilibrium, clearly indicating the units that CS and PS are measured in.
• What was the impact of the temporary supply shock on consumers and producers, based on the comparison of CS and PS in Questions 1 and 2? In other words, were each of these two groups of market participants hurt or made better off by change? Why? (Narrative response; suggested length of three to four sentences or one paragraph.)

Question 3

Suppose a certain city has a monopoly cable-television company. This company has total costs TC = 0.25Q² + 100. (Hint: using calculus, this means MC = 0.5Qsince MC is the derivative of TCwith respect to output.)

The demand in the community is approximated by the equation Q_d = 120 - 2P.

• Graphically depict the demand curve as well as the marginal cost (MC) curve.
• If the cable company is free to choose its own price P_m and quantity Q_m, graphically depict the monopoly equilibrium price and quantity. Add any other curve(s) to your diagram that may be required to obtain this outcome.
• Compute and state the exact monopolist equilibrium price P_m and quantity Q_m that you depicted graphically.
• What will be the profit made by the monopolist in this case? Please explain how you calculated this profit.

Question 4

Continue with your analysis of the monopoly cable-television company from Question 3, with demand of Q_d = 120 - 2Pand MC = 0.5Q.

• Reproduce the graph which shows your demand and marginal cost (MC) curves, as well as any other necessary curves.
• Graphically indicate the socially optimal output level, Q_soc, and compute the quantity and price associated with this output.
• Depict areas of consumer surplus (CS_SOC), producer surplus (PS_SOC), and any possible deadweight loss (DWL_SOC) associated with socially optimal outcome.(You do not need to determine the numerical size of CS, PS, and DWL, just show them graphically.)
• Depict areas of consumer surplus (CS_m), producer surplus (PS_m), and any possible deadweight loss (DW_mL) associated with monopoly. (You do not need to determine the numerical size of CS, PS, and DWL, just show them graphically.)
• Explain how you've determined the socially optimal output level. How does the socially optimal output compare to the monopolist output in terms of individual CS, PS, and DWL (e.g., compare CS_m and CS_SOC, and so on)? How does the total surplus (sum of consumer and producer surpluses) compare between the two situations? (Narrative response; suggested length of four to eight sentences or one to two paragraphs)