Industrial Organization
Midterm#1 (100pts)
Name:
1. (10 pts) Cost function of producing umbrellas is given by C  Q   60  Q  Q2 .
a) Is it a short run or a long run cost function? How do you know?
1.
b) What is the fixed and variable cost?
3. FC(Q)=
5. VC(Q)=
c) At what quantity average cost is minimized?
7.
2. (5 pts) There are two retail technologies, call them “Walmart” and “Grocery store”. Their corresponding costs are
given by CWM  Q   200  Q and CGS  Q   10  2Q .
a) Calculate the quantity at which the two technologies have the same average cost
9.
b) Draw and label two short run AC ruves and the long run AC curve
11.Q
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 1
3. (25pts) Market demand is given by Q  110  5 P . The cost function of is given by C  Q   16  2Q  Q2
a) Derive firm’s short run supply function
13.
b) Derive short run supply of 10 firms. 15.
c) Derive long run supply of 10 firms
17.
d) Calculate short run market equilibrium price when there are 10 firms in the market
19.
e) Calculate short run market equilibrium quantity when there are 10 firms in the market21.
f) What is each firm’s marginal revenue?23.
g) Calculate each firm’s total revenue
25.
h) Calculate each firm’s profit
27.
i)
Show the relation between firm and market price and quantity on the graph below.
29. Firm
Market
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 2
4. (4pts)Hair gel can be produced using one of the two technologies: technology A and technology B. Their respective
cost functions are given by CA  Q   25  Q2 and CB  Q   18  1.5Q2 , which technology will prevail in the long
run competitive equilibrium? Explain why by showing your calculations.
32.
5. (10pts)Market demand is given by Q  80  P  I , where I  20 is the income. The cost function is
C  Q   25  Q2 .
34. Q=
a) Calculate long run output per firm
b) Calculate the long run price in this market 36. PLR=
c) How many firms would operate in this market in the long run equilibrium?
38. N=
6. (5pts) Starting with your answer to the previous question, assume that the economy goes into a recession and the
income decreases by 50%. What will happen to the profits of the existing firms in the short run?
a) Derive the short run supply (don’t forget the shut down condition)40. Q=
b) Calculate the change in firm’s profits.
42. Profits decrease from _________ to __________
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 3
7. (20 pts)Market demand is given by Q  12  P . Monopoly’s cost is given by C  Q   2  2Q
a) Find marginal revenue
44. MR=
b) Find marginal cost
46. MC=
c) Calculate monopoly quantity48. QM=
d) Calculate monopoly price
50. PM=
e) Calculate monopoly profit
52.  
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 4
f) Demonstrate the above situation on the graph below. Label the demand, MC, AC, MR, equilibrium quantities,
profit.
Q
g) What is the maximum amount that this monopoly would be willing to spend on R&D to lower marginal cost by
50%?
55.
8. (2 pts) Explain why a perfectly competitive equilibrium does not exist in industries with constant marginal cost.
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 5
9. (5pts) Jared owns a gas station. Jared’s gas station is a monopoly in a small town with demand that is given by
Q  13  P . His fixed cost is 10, his average variable cost is constant and is equal 1 per unit. Jared buys gasoline
from a refinery at PR  2
57. P=
a) What price does Jared charge?
59. PNEW=
b) If the refinery price increases to 4, what will happen to the price of gasoline? (calculate)
c) What will happen to the profit? (calculate)61. Profit will go from _____ to _______
10. (2pts) The market demand for corn is given by Q  55  P . Productivity in agriculture depends on the quality of
land. Five farms are located on good land and can produce corn using a technology for which min AC1  5  5 all
other farms (if any) do not have access to the better land of the five farms and can produce corn using a technology
for which min AC1  5  10 . Find the long run price in this market.
63. PLR=
Note: AC  5 denotes the average cost of 5 units. Feel free to use a graph to show your answer.
11. (2 pt)Other than the number of firms, what is the difference between monopoly and perfect competition?
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 6
12. (3pts) Some industries compete on quality. How is the difference in the evolution of industrial structure (i.e. number
of firms) on newspapers and restaurants is driven by the effect of quality on cost?
13. (3pts) Perfectly competitive model applies in the strict sense only to a handful of very regulated markets (stock
market, commodities market, foreign exchange market). Many other markets however resemble perfectly competitive
markets and can be analyzed using the perfectly competitive model. Please give one example (from the class
discussion) of a market or an industry that resembles perfectly competitive market structure and describe the
similarities.
14. (1ps) What is the relationship between price elasticity of demand and the price.
65. Monopolies charge higher markups in the markets where the absolute price elasticity is __________ (high/low)
15. (3pts) A monopoly pharmaceutical company is selling a drug in two countries with different incomes. The demand
for drug in both countries is given by Q  100  P  I , where I is the income. The income of the Cowbonia is 20 and
the income of Ramsia is 10. The constant marginal cost is the same in both markets and is equal to 1. The fixed cost is
sunk. Which country has higher absolute price elasticity at the market price?
67.
Explain or show calculations or show a graphical answer (Hint: you do not need to perform any calculations to answer
this question)
16. (3 pts) Which predictions of the perfectly competitive model are observed in the TV set industry? (name at least two)
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 7
17. (2 pts)How can a government create a monopoly? (name more than one way)
18. (1 pt) What does rent-seeking do to the dead weight loss from monopoly?
69. DWL increases/decreases
19. (3 pts) What are three main barriers to entry according to Bain
20. (2 pts) What do consumer and producer surplus measure?
21. (2 pts) What is the relation between market demand elasticity, firm demand elasticity, and the number of firms
22. (2 pts) How did USPS prevent entry?
Please write your final answers into the boxes. Answers without explanations where it is requested will not be credited
page 8