Question

Assume that notebook paper is sold in a perfectly competitive industry. The industry inverse short-run supply curve (or marginal cost curve) is P = MC = 4Q, where Q is measured in millions of reams per year. The inverse demand for notebook paper is P = 60 – 6Q. Suppose that, in their production process, paper manufacturers have been dumping waste in the nearby streams. The external marginal cost is estimated to be $1 for each ream produced. Calculate the socially optimal level of output and price for the paper industry.

Question 7 options: Socially optimal output = 5.9 million reams of paper and socially optimal price = 16.6 per ream Socially optimal output = 3.9 million reams of paper and socially optimal price = 16.6 per ream Socially optimal output = 3.9 million reams of paper and socially optimal price = 24.6 per ream Socially optimal output = 5.9 million reams of paper and socially optimal price = 24.6 per ream Question 8 (1 point) Which of the following industries is an oligopoly market?

Question 8 options: Oranges Laptops Shirts Electricity Question 9 (1 point) Suppose that the inverse market demand for oranges is given by P = $10 – 0.05Q, where P is the price of oranges and Q is quantity of oranges. Suppose that Freshfruits and Purefruits are the only two producers of oranges and they are Bertrand competitors. Both Freshfruits and Purefruits can grow oranges at a constant marginal cost of $1 per packet. Each of them sells 90 packets of oranges at a price of $1. Now suppose Freshfruits develops a new technology so that their marginal cost fall to $0.90. Which of the statement is correct?

Question 9 options: Purefruits sell 180 packets of oranges by pricing their product so as to undercut Freshfruits by the least amount possible. Freshfruits output falls to zero. Freshfruits sell 180 packets of oranges by pricing their product so as to undercut Purefruits by the least amount possible. Purefruits output still sell 90 packets of oranges. Freshfruits sell 180 packets of oranges by pricing their product so as to undercut Purefruits by the least amount possible. Purefruits output falls to zero. Both the producers still sell 90 packets of oranges.

Answer 1

Q. 7

P = MC = 4Q

MPB = P = 60 – 6Q

MEC = $1

Now, MSC = MEC + MC = 4Q + 1

Socially optimal level: MPB = MSC

Thus, 4Q + 1 = 60 - 6Q

10Q = 59

Q = 5.9 million reams

Thus, P = $24.6 per ream

This is the socially optimal price

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Q.8

Laptops belong to an oligopoly market.

With a few large players globally, the market share is concentrated among these large firms. They are similar in terms of price and features, and it is very difficult for new firms to enter.

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Q.9

P = $10 – 0.05Q

Initially, MC for both firms = $1

Now, set P = MC

Thus, 1 = 10 – 0.05Q

Q = 180

In Bertrand competition with homogenous products, both firms will continue to sell at P = MC at equilibrium.

If one firm is able to lower the price, all the consumers switch to that firm. This is till the other firm can also lower the costs. Here, Freshfruits has been able to lower the MC.

Freshfruits sell 180 packets of oranges by pricing their product so as to undercut Purefruits by the least amount possible. Purefruits output falls to zero.