8. Each firm belonging to a competitive industry has the following long-run cost function 9² q³ 2 16 C(q) = 10q + where q denotes the output of a representative firm. Firms can enter and exit the industry freely. The industry has constant costs: input prices do not change as industry output changes. The market demand facing the industry is given by Q = 21 - P where Q denotes industry output and P is the market price of output. (a) Derive the long-run market equilibrium price and quantity. (b) Suppose the government introduces a quota of 6 units on the industry. Free entry ensures that the market price does not change from part (a). Given this, calculate the deadweight loss from the quota assuming the most pessimistic scenario: out of the set of consumers with willingness- to-pay above the market price, those with the lowest willingness to pay obtain the object. (c) Suppose the agents who obtain the object in part (b) can resell. Specify the demand function and supply function in the resale market and calculate the equilibrium resale price. (d) Once resale takes place, what is the deadweight loss from the quota?

8. Each firm belonging to a competitive industry has the following long-run cost function 9² q³ 2 16 C(q) = 10q + where q denotes the output of a representative firm. Firms can enter and exit the industry freely. The industry has constant costs: input prices do not change as industry output changes. The market demand facing the industry is given by Q = 21 - P where Q denotes industry output and P is the market price of output. (a) Derive the long-run market equilibrium price and quantity. (b) Suppose the government introduces a quota of 6 units on the industry. Free entry ensures that the market price does not change from part (a). Given this, calculate the deadweight loss from the quota assuming the most pessimistic scenario: out of the set of consumers with willingness- to-pay above the market price, those with the lowest willingness to pay obtain the object. (c) Suppose the agents who obtain the object in part (b) can resell. Specify the demand function and supply function in the resale market and calculate the equilibrium resale price. (d) Once resale takes place, what is the deadweight loss from the quota?

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.7P

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