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Problem Set 1 Industrial Organization

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Problem Set 1

1. MPL = 30 MPL/MPK = w/r MPK = 24 r = 15 30/24 = w/15

w = 18.75

2a. A = E > C = B > D
2b. A = C > B

3a. Q = 5KLL w = 8 r = 15 MPL/MPK = w/r = 8/15
3b. rK = (15)(10) = 150 wL = 150 8L = 150 L = 18.75 4a. Q = 2KLLL K = 2 Q = 2(2)LLL = 4LLL
At L = 1, Q = 4
At L = 2, Q = 32
At L = 3, Q = 108
At L = 4, Q = 256 MPL for 4th worker = 256 - 108 = 148
4b. This production function exhibits increasing returns to scale.

5a. AVC = ATC since AFC = 0
Price = 2.50
MC = 1.20
5b. No, they are not at a long run equilibrium, producers are benefiting for a surplus and in a long run more firms will enter the industry bringing the surplus to 0, pricing will be at P = MC.

6. Rule of thumb pricing P = MR = MC

MR = P + P (1/E) = MC
P = MC/ ((1 + (1/E))
C = 125 + 25Q
MC = dC/dQ = 25
P = 25/((1 +(1/-3)) = 37.5

7a. P = 1100 - 2Q C=Q
Total Revenue = P x Q = (1100 -2Q) x Q = 1100Q – 2QQ

Marginal Revenue = dTR/dQ = 1100 – 4Q
Marginal Cost = dC/dQ = 1

MR = MC
1100 – 4Q = 1
Q = 274.75 P = 550.5
7b. MC=1 MR = 550.5 Markup = (P – MC)/P = 0.9982 = 99.82%
7c. Profit = Marginal Profit x Q = 549 x 274.75 = 150995.125
8.

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