Suppose there are n identical firms in a market in long-run. Each firm’s cost function is given by C = 32 + 0.5q 2 , where q is the amount that an individual firm produces. This means that an individual firm’s marginal cost is given by MC = q. Also, the market demand is given by P = 96 − 2Q, where Q is the total amount of the good produced by all of the firms combined. Therefore, Q = n · q.

(a) How much output will each of them produce?

(b) What will be the market price?

(c) How many firms operate in long run? That is find n.

(d) What is the value of consumer surplus?

(e) What is the individual firm’s supply curve?

(f) What is the market supply curve?

Exercise 2. (22 points) (Constant Marginal Cost) Suppose a monopolist faces the following demand curve: P = 100 − 2Q. The marginal cost of monopolist is constant and equals to 20 and fixed cost equals to 0.

(a) What is the monopolist’s profit maximizing level of output?

(b) What price will the profit maximizing monopolist charge?

(c) What is the value of consumer surplus under monopoly?

(d) What is the value of producer surplus under monopoly?

(e) What is the value of deadweight loss?

(f) What is the value of consumer surplus if the market was perfectly competitive?

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