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 ofQ_d= 300 - 2Pand supply ofQ_s= 2P - 100.

• Solve for equilibrium priceP₁and quantityQ₁.
• Depict the supply curveS₁and demand curveD₁on the usual P, Q diagram. Label all intercepts. 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).

Question 2

Continuing your analysis of the competitive US manufacturing industry from Question 1, with demand ofQ_d= 300 - 2Pand supply ofQ_s= 2P - 100, suppose a technological innovation causes the supply curve to increase, shifting the curve down by $20 for every given quantity Q.

• Determine the new supply equation. Solve for equilibrium priceP₂and quantityQ₂.
• Depict the original supplyS₁, the new supplyS₂, and the original demandD₁on the usual P, Q diagram. Label all intercepts. 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.
• Who has benefited from technological innovation, based on the comparison ofCSandPSin Questions 1 and 2? Consumers, producers, or both? 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 costsTC = Q²+ 10Q + 75.(Hint: using calculus, this meansMC = 2Q + 10sinceMCis the derivative ofTCwith respect to output.)

The demand in the community is approximated by the equationQ_d= 85 - P/2(alternatively, you can write the demand equation asQ_d= 85 - 0.5P).

• Graphically depict the demand curve as well as the marginal cost (MC) curve.
• If the cable company is free to choose its own priceP_mand quantityQ_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 priceP_mand quantityQ_mthat you depicted graphically.

Question 4 (15 points)

Continue with your analysis of the monopoly cable-television company from Question 3, with demand ofQ_d= 85 - P/2(alternatively, you can write the demand equation asQ_d= 85 - 0.5P) andMC = 2Q + 10.

• 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 withsocially optimal outcome.(You do not need to determine the numerical size ofCS,PS, andDWL, just show them graphically.)
• Depict areas of consumer surplus (CS_m), producer surplus (PS_m), and any possible deadweight loss (DW_mL) associated withmonopoly.(You do not need to determine the numerical size ofCS,PS, andDWL, 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 individualCS,PS, andDWL(e.g., compareCS_mandCS_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.