Prof. Bryan Caplan

bcaplan@gmu.edu

http://www.gmu.edu/departments/economics/bcaplan

Econ 103

Spring, 2000

 

HW#5 Answer Key

 

Gwartney and Stroup:(2-3 sentences)

 

Chapter 7, Critical Analysis: 11

 

11. This all depends on the shape of firms' AC curves. If the AC curve turns up quickly, large firms will be unable to survive in competition against small firms. If the AC curve turns up slowly, small firms will be unable to survive in competition against large firms.

 

Chapter 8, Critical Analysis: 2, 11

 

2. This is false. Monopolies do more than transfer wealth from buyers to sellers. There are also deadweight costs that arise because monopolies charge prices above marginal cost.

 

11. When transportation costs fall, more and more firms become potential (and actual) competitors in every market. In a small rural town 100 years ago, almost every seller was the ONLY supplier of certain products in the town. Today, even in a small rural town there are many alternative suppliers - mail order, for example. Thus, markets are probably much more competitive than 100 years ago.

 


Additional Problems

 

1. A. $9999 - GM just undercuts Ford's marginal cost.

 

B. GM earns $1999 per car sold, and sells a positive quantity. Therefore it's profits are positive. Ford and Chrysler would both lose money on each car produced if they did produce any (which they won't!).

 

C. 1 - GM.

 

D. Now GM and Ford split the market, and the price is $10,000. GM loses $1999 in profit per car; Ford still makes no profit; consumers pay $1 more per car.

 

 

2.

Price

per ton

Quantity (tons)

Total Revenue

Total Cost of Lancaster

Total Cost of York

Total Profit of

Lancaster

Total Profit

of York

1000

1000

1,000,000

400,000

500,000

600,000

500,000

900

1500

1,350,000

600,000

750,000

750,000

600,000

800

3000

2,400,000

1,200,000

1,500,000

1,200,000

900,000

700

3200

2,240,000

1,280,000

1,600,000

960,000

640,000

600

3400

2,040,000

1,360,000

1,700,000

680,000

340,000

500

3600

1,800,000

1,440,000

1,800,000

360,000

0

400

3800

1,520,000

1,520,000

1,900,000

0

-380,000

300

4000

1,200,000

1,600,000

2,000,000

-400,000

-800,000

200

4200

840,000

1,680,000

2,100,000

-840,000

-1,260,000

A. Price would be 800; quantity 3000; profits 1,200,000.

B.                 Price would be 800; quantity 3000; profits 900,000.

C.                 Lancaster would win and pay 900,001 - just enough to beat York.