Author Question: Industry demand is given by: QD = 1000 P All firms in the industry have identical and constant ... (Read 49 times)

CORALGRILL2014 · **on:** Jul 1, 2018

Industry demand is given by: QD = 1000 P

All firms in the industry have identical and constant marginal and average costs of 50/unit.

a. If the industry is perfectly competitive, what will industry output be? What will be the equilibrium price? What profit will each firm earn?
b. Now suppose that there are five firms in the industry, and that they collude to set price. What price will they set? What will be the output of each firm? What will be the profit of each firm?

Question 2

In the presence of a negative externality, a specific tax can achieve the social optimum because

A) output is reduced to zero as a result.
B) it internalizes the external cost.
C) it directly charges the producer for polluting.
D) the price of the good rises by the full amount of the tax.

randomguy133 · **Reply #1 on:** Jul 1, 2018

Answer to Question 1

a. P = 50, so Q = 950. Each firm earns an economic profit of zero.
b. MR = 1000 - 2Q. Set MR = MC
50 = 1000 - 2Q
Q = 475
P = 525
Each firm produces 1/5 the output, or q = 95. Profit for each firm is 45,125.

Answer to Question 2

B