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1. Biwei’s Barbershop is a business in a perfectly competitive market with a daily total cost of TC = 0.5Q2. The corresponding marginal cost is MC=Q. Assume that the market price of a haircut is $15. How many haircuts should Biwei give each day if he wants to maximize his profit? What is the profit? (10 points)

2. Biwei decides to set up a small business in NYC. The start-up cost is $1000 for a license and the estimated direct cost is $4 per output. Analyze Biwei’s cost functions and answer questions. (20 points)

1) Express total cost, average cost, and marginal cost as a function of Q. Sketch their graphs.

2) Is the initial cost of $1000 Biwei’s cost? Explain.

3) In a perfectly competitive market, Biwei’s maximum production capacity is 100 units per week. The market price for the product is $4.5. What is the economic rent per week?

4) What is the rent per week if the market price is $3.9? Would Biwei stay in business and what determines his temporary shutdown or exit decision?

5) After one year, Biwei’s business becomes profitable. Sonia plans to enter the same business in the same area. What would be the cost facing Sonia? Does she face the same cost as Biwei?

6) What would be the market competition effect of Sonia’s entry on Biwei’s business? Would it reduce Biwei’s cost? Would it reduce Biwei’s rent? Explain.

7) After two years, Biwei’s business is in rapid expansion. He wants to raise $1M new capital. He can finance via taking a loan or issuing stocks. The market interest rate for a loan is 5%. For an angel investor, injecting $1M into Biwei’s business will dilute 50% of Biwei’s ownership. What is the capital cost of Biwei’s business expansion?

3. Biwei’s firm with market power faces a demand curve for its product of P=100–10Q, which is also the firm’s average revenue curve. The corresponding marginal revenue curve is MR=100-20Q. Assume that the firm faces a marginal cost curve of MC=10+10Q. (20 points)

1) If the firm cannot price-discriminate, what is the profit-maximizing level of output and price?

2) If the firm cannot price-discriminate, what are the levels of consumer and producer surplus in the market, assuming the firm maximizes its profit? Calculate the deadweight loss from market power.

3) If the firm has the ability to practice perfect price discrimination, what is the firm’s output?

4) If the firm practices perfect price discrimination (fully extract consumer surplus according to their marginal use values), what are the levels of consumer and producer surplus? What is the deadweight loss from market power?

HARPUR COLLEGE • BINGHAMTON UNIVERSITY

2

ECON 160 B FALL 2019

4. Squeaky Clean and Biobase are the only two producers of chlorine for swimming pools. The market demand for chlorine is P=32–2Q, where Q is measured in tons and P is dollars per ton. The corresponding marginal revenue curve is MR=32-4Q. Assume that chlorine can be produced by either firm at a constant marginal cost of $16 per ton. (20 points)

1) If the two firms collude and act like a monopoly, agreeing to evenly split the market, how much will each firm produce and what will the unit price be? How much profit will each firm earn?

2) Does Squeaky Clean have an incentive to cheat on this agreement by producing an additional ton of chlorine? Explain.

3) Does Squeaky Clean’s decision to cheat affect Biobase’s profit? Explain.

4) Suppose that both firms agree to each produce 1 ton more than they were producing in part (1). How much profit will each firm earn? Does Squeaky Clean now have an incentive to cheat on this agreement by producing another ton of chlorine? Explain.

5. A society of four individuals, A, B, C, and D, each characterized by his demand for automobiles, as given in the table. Assume that all automobiles are identical. The demand schedules for each person and for the group conform to the law of demand. (30 points)

Car-ownership demands of A, B, C, and D

Quantity of automobiles

Price

A

B

C

D

Total

$1,000

2

0

1

1

900

2

0

1

1

800

2

0

1

2

700

2

0

1

2

600

3

0

1

2

500

3

1

1

2

400

3

1

2

2

300

3

1

2

3

200

3

1

2

4

100

4

2

2

4

1) Fill in the last column and draw the market demand curve for automobiles.

2) Compare A’s demand schedule with B’s, can we infer that B is wealthier than A? Why?

3) Suppose there are seven cars in this community, what is the equilibrium price?

4) Suppose all seven cars are owned by A, others have none. If A would like to sell some of his cars at the price of $800 per unit, who will be the buyers? How many cars will be sold?

5) At the price of $800, how many cars would A like to own? How many cars does he actually own?

6) At the price of $800, is quantity demanded equal to quantity supplied in the market? Could the market reach equilibrium?

7) What would A do if he wishes to maximize his benefit?

8) Suppose all seven cars are owned by B while others have