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The Hints For PS2

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12 views4 pages

The Hints For PS2

Uploaded by

hugocalpena13
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Hints for PS2

APART FROM A FEW EXCEPTIONS, THIS DOCUMENT DOES NOT CONTAIN THE STEPS TO REACH
THE SOLUTION. REMEMBER, IF YOU DO NOT KNOW HOW TO PROCEED, YOU SHOULD PAUSE AND
REVIEW THE CLASS MATERIAL AND/OR THE CORRESPONDING CHAPTER IN VARIAN.

1.-7. we discussed in class.


8.
a)-c) In this problem you just need to use the formulas for elasticity we have seen in
class. Consumer 1 has linear demand, consumers 2 and 3 are iso-elastic.
d) Remember how to aggregate (by summing over quantities).
D( p) = 4(x1( p)) + 3(x2( p)) if p ≤ 10 and D( p) = 3(x2( p)) if p > 10 since
consumers of type 1 leave the market if p > 10.
e) By d) if p = 6 then the relevant part of demand contains both types of
consumers. Therefore D( p) = 4x1( p) + 3x2( p) = 4(20 − 2p) + 3(3/p).
p
You just need to calculate | ε( p) | = | D′( p)( ) | and you’ll get | ε(6) | = 1,5.
D( p)
9.
This problem is similar to 8. You need to know how to calculate elasticity and you
need to know how to derive aggregate demand.
b) For example, you should find that elasticity for consumer A is 1 if p=100 and for B
it is 1 if p=11,25. You should by now also be able to find that demand changes slope
depending on which types of consumers are willing to buy the good:
0 if p > 200
D(p) = 200 − p if 22,5 ≤ p ≤ 200
290 − 5p if p < 22,5

d) Notice that we get two points where elasticity is 1, depending on the types of
consumers that are present. One is for p=100 (only serving consumers of type A)
and the other is for p=29 (serving both types).
f) Recall from class that revenue is maximized MR=0 if elasticity equals 1. In order
to know which point maximizes revenue, we have to compare the two prices where
elasticity is 1 (or MR is 0), the revenue with p=100 amounts to
100*D(100)=(100)*(200-100)=10000 while the one with p=29 only gives us
29*D(29)=29(290-5(29))=4205. The former is bigger, so we maximize revenue with
p=100.
e) At p=100, only consumers of type A are served.

10.
This problem is easier than 9. You simply need to maximize revenue (which
happens at elasticity 1 if there is no capacity constraint).
…
d) After following all steps, you should set the ticket price to 10 Euros.

h) with the increased demand, you face a capacity constraint. At the price where
MR=0 (price equals 15), you are not able to satisfy demand because you run out of
seats. So you look for the price that is low enough to make sure that all tickets are
sold. This price is now 20.
11.
This is an easy problem of computing consumer surplus. You should get that
surplus has decreased by 45 Euros.
12.
Discussed in class. This is like problems 1-3. but with a function that is not Cobb-
Douglas.
You should solve it using the optimality conditions which say pMPL = w for labor
and pMPK = r for machinery.

13.
As usual, compute marginal cost to find supply S( p ) for each firm (p=MC).
Firms of type 1 have S1( p) = p. And firms of type 2 have S2( p) = 3p. Then
you can aggregate across all firms. Your result should then say S(p)=100p
+80*3p=340p.
14.
This one is a bit more tedious in terms of the algebra because you have to
use the quadratic formula.
I put here the answer for type 1:
Solution: The MC of type 1 is:
MC1 = 6q 2 − 4q + 6
Set MC equal to price from FOC:
6q 2 − 4q + 6 = p
This only gives you inverse supply under the condition that the firm enters
the market (remember the theory from class). We have to make sure that the
firm earns a positive producer surplus so that we are on the increasing part
of average cost!
So let’s check when this is the case:
ATC(q) = 2q 2 − 2q + 6
The minimum is obtained when ATC’(q)=0
4q − 2 = 0 so q = 0,5 and ATC(0,5) = 5,5
So this firm will enter the market if p ≥ 5,5 according to 6q 2 − 4q + 6 = p
and it will stay out of the market if p < 5,5.
Notice that the positive part of supply S1( p) can be found by solving the
quadratic equation 6q 2 − 4q + 6 = p.
4 ± 16 − 24(6 − p)
The solution is q1,2 = The positive root gives you the
12
4 + 24p − 128 2 + 6p − 32
supply function S1(p)= = for firms of type 1.
12 6
Now do the same for the firms of type 2, and you will see that its average cost is
minimized at q = 0,25, so that ATC(0,25) = 1,5.
You can then find that for low prices nobody enters. For intermediate prices, firms of
type 2 enter. For high prices, both firms are present in the market.
0 if p < 1,5
2+ 6p − 8
S(p) = 10 12
if 1,5 ≤ p ≤ 5,5 .
2+ 6p − 8 2+ 6p − 32
10 12
+8 6
if p > 5,5

Problems 15 (25 firms) 16 (57 firms), 17 (20 firms) are just different numerical
examples of Problem 4., where we look for the minimum average cost. If you
already know how to find the solution in 4., you don’t need to redo them all.

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