Boredom is a rather dull place. The population is 10,000 and every resident has

Question

Boredom is a rather dull place. The population is 10,000 and every resident has exactly the same income, $3600, and exactly the same preferences for widgets (wc) and other goods (Y), given by the following utility function with its related marginal rate of substitution function:

U = wc.01Y.99

MRSw,Y= Y/(99wc)

The price of other goods is 1.

The widget industry in Boredom is perfectly competitive. Each widget firm has the following total cost function:

TC = .02wf3– 1.6wf2+ 50wf

(a). Solve for the long-run equilibrium price and quantity in the market for widgets in Boredom. How many widgets will each consumer purchase? How many will each firm produce? How many firms will operate?

(b). Suppose that production and consumption of widgets is banned in Boredom. Which, if any, of the following groups would be worse off as a result: Consumers of widgets? Owners of widget firms? Owners of inputs used in the production of widgets? How do you know?

Explanation / Answer

Boredom is a rather dull place. The population is 10,000 and every resident has

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