Download Problem Set 3

Spring 2013
North Carolina State University
EC 201 H
Microeconomics
Problem Set Three
Due March 15
1.
The law of demand may be stated as “Demand curves are downward sloping.” Yet
in our model of competitive firms, we start out by stipulating that the firm behaves
as if it faces a horizontal demand curve. Is this inconsistent? Explain briefly.
2. True, false, explain briefly. Regardless of price, competitive firms produce at the
minimum point on the average total cost curve because that quantity is the one that
maximizes profits.
3. Suppose the government imposes a requirement that all gasoline stations install
vapor recovery equipment. The equipment will cost $1000 per year, regardless of
the amount of gasoline that the station sells. Officials argue that the step will not be
costly to consumers because it represents a facilities cost and does not add anything
to the direct cost of providing a gallon of gasoline to the consumer. Assume that the
industry is now in full competitive equilibrium. Evaluate the officials’ claim for
both the long run and the short run.
4. (Before you work on this problem, be sure you understand problem N7 in chapter 7,
page 213, which is the problem that we considered in class.)
Assume that the total cost for a firm that is producing picnic tables is
TC = 20,000 + q2 /50. This would imply that MC = q/25.
(q denotes output of the firm, Q denotes industry quantities)
a. If the demand in a particular market is Q = 14,000 - 100P, what is the competitive
equilibrium price, total output of the picnic-table industry, and number of picnic table
firms in this market? You may assume that picnic-table manufacturing is a competitive
constant-cost industry.
b. At this long-run equilibrium, is there a short-run supply function for picnic tables?
If so, what is it?