Consider the following competitive market: Inverse of demand function: P D (Q) =

ID: 1187422 • Letter: C

Question

Consider the following competitive market:

Inverse of demand function: PD(Q) = AD â€“ BDQ

Production cost of each firm: TCFIRM(q) = (1/2)Mq2 + F

Entering the market is free but there is an exit cost equal to phi

Assume that profits per firm are â€“ phi.

a) Define an equilibrium for this environment.

b) Solve for the equilibrium you defined in part a.

c) The government wants to sell X units in this market. The cost it paid for those

units is C and they were bought in a foreign market (local producers did not

sell this units to the government). Define an equilibrium for this

environment.

d) Solve for the equilibrium you defined in part b.

e) Perform a CBA of the project defined in part c.

f) Assume that the government wants to impose a subsidy of s percent per unit

traded. Define an equilibrium for this environment.

g) Assume that the government wants to buy X units in this market to give it to

the poor. Define an equilibrium for this environment.

WTF ? :P

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