Economics 460 Problem Set #1 Answers

Economics 460 Problem Set #1 Answers

1.  Waldman/Jensen 2.3

a. TC = q2 +100

MC = 2q

MC = 2q = 60 = P (f.o.c.)

Q = 30

b.  P = PQ – TVC - TFC

= 1800 – 900 – 100 = 800

c.  Since 2qs = P,

qs = P/2

d.  Qs = 100P/2 = 50P

2.  Waldman/Jensen 2.4

a. P = 53 - Q

MR = 53 – 2Q

b. MR = 53 – 2Q = 5 = MC (f.o.c.)

Q = 48/2 = 24

P = 53 – 24 = 29

c.  PM = Q(P – AC)

= 24( 29 – 5) = 576

d. (1/2) (24)(53-29) = 288 (consumer surplus under monopoly)

e.  Q = 53 – PC = 53 –5 = 48

PC = MC = AC = 5

f. (1/2) (53 – 5) 48 = 1152 (consumer surplus under competition)

g. dwl = (1/2)(PM – PC)(QC – QM)

= (1/2)(29 – 5)(48 – 24) = 288

h.  288 + 576 +288 = 1152 => CSM + PM + dwl = CSC

3.  Based on the information given, both railroads sustained equal economic losses.

The loss each sustained was equal to the economic value of the locomotive: the

present value of the profits it could generate over its remaining service life.

These appear to be equal. While the problem suggests that there are differences in their accounting or financial values, these are sunk and not relevant to the economic harm their owners sustained.

4. a. The answer is correct if the owners supply no resources to the firm except

equity capital. This is most likely to be the case for a publicly owned corporation. [However, to the extent that board members or senior managers own company stock, the distinction between the remuneration of their labor and that of their equity is a somewhat blurred.]

b. [It is easiest to answer these questions in reverse order.] Economic

equilibrium occurs when there is no tendency for resources to flow between industries or uses. The Law of One Price in resource markets is that, at equilibrium the price of any resource or factor of production is the same in all transactions (uses). Economic profits are the reward to owners (for, say, equity capital) over and above their reward in other uses. If they are positive (or negative), not all capital flows necessary for equilibrium have been completed. Equalization of their returns is required for equilibrium, and zero economic profits are a necessary result.