Problem 1: Consider a perfectly competitive industry composed of N identical firms in the short run. The firm produces output, q, using labor (L) and capital (K): q=√LK In the short run, each firm's capital is fixed at one unit. Each unit of labor and capital cost w and r respectively. The industry demand curve is given by: P=a-Q, a>0 1. Find the short run equilibrium price, firm output, and industry output. 2. How will the short run equilibrium price and outputs vary with a change in the wage rate, w? Explain your answer. 3. How will the short run equilibrium price and outputs vary with a change in the rental rate, r? Explain your answer.

Problem 1: Consider a perfectly competitive industry composed of N identical firms in the short run. The firm produces output, q, using labor (L) and capital (K): q=√LK In the short run, each firm's capital is fixed at one unit. Each unit of labor and capital cost w and r respectively. The industry demand curve is given by: P=a-Q, a>0 1. Find the short run equilibrium price, firm output, and industry output. 2. How will the short run equilibrium price and outputs vary with a change in the wage rate, w? Explain your answer. 3. How will the short run equilibrium price and outputs vary with a change in the rental rate, r? Explain your answer.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter19: Externalities And Public Goods

Section: Chapter Questions

Problem 19.1P: A firm in a perfectly competitive industry has patented a newprocess for making widgets. The new...

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A firm in a perfectly competitive industry has patented a newprocess for making widgets. The new process lowers the firm’saverage cost, meaning that this firm alone (although still aprice taker) can earn real economic profits in the long run. a. If the market price is $20 per widget and the firm’s marginalcost is given by MC=0.4q , where q is the dailywidget production for the firm, how many widgets willthe firm produce? b. Suppose a government study has found that the firm’snew process is polluting the air and estimates the socialmarginal cost of widget production by this firm to be. If the market price is still $20, what is thesocially optimal level of production for the firm? Whatshould be the rate of a government-imposed excise tax tobring about this optimal level of production? c. Graph your results.
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