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ECON 428

Fall 2021

Homework 1

This is an individual assignment in the sense that each individual must submit his or her answers. However, you should feel free to work with another classmate to solve the problems. Ultimately, it is important that each individual understand how to solve these problems because questions similar to these will appear on exams. Turn in via Canvas.

1. If demand is given by and the selling price is , compute consumer surplus.

2. If a competitive firm’s cost function is compute the firm’s marginal cost function and the quantity  that it will choose to produce when the price is

3. In Problem 2, what quantity would the firm produce at prices less than ?

4. In Problem 2, if there are ten such firms, then the industry marginal cost curve is . If this industry faces the demand curve in Problem 1, then the quantity produced is at a price of . If the ten firms merge, then the resulting monopolist faces the demand curve in Problem 1 and would have . What quantity would this monopolist produce? What would be the price?

5. What is the dead weight loss to society due to monopoly pricing in Problem 4.

6. Consider the market for electricity. Suppose demand (in megawatt hours) is given by and that the marginal private cost of generating electricity is 10 USD per megawatt hour (P is in the same units). Suppose further that smoke is generated in the production of electricity in direct proportion to the amount of electricity gen-erated. The health damage from the smoke is 15 USD per megawatt hour generated. (What is meant here is that MC and MD are 10 and 15 respectively, not 10Q and 15Q.)

(a) Suppose the electricity is produced by an unregulated monopolist. What price will be charged, and how much electricity will be produced?

(b) In part (a), what is the consumer surplus from the electricity generation? What is the total surplus, taking into account the pollution damage?