Answer questions 11 -15 based on the following: The market demand curve for good
ID: 1248079 • Letter: A
Question
Answer questions 11 -15 based on the following:The market demand curve for good x is given by P = 10 – Q, and the market supply curve is given by MC = Q, where Q = # units of good x and P is $/unit. Good x is sold in a perfectly competitive market.
11. What price is taken by firms in this market?
(a) P = $5 (b) P = $15 (c) P = $20 (d) P = $10 (e) none of these responses
12. Suppose Firm 1’s marginal cost is given by MC = 5Q. What price will Firm 1 charge its customers?
(a) P = $1 (b) P = $5 (c) P = $8.33 (d) P = $10 (e) none of these responses
13. How much output will Firm 1 produce?
(a) .334 units (b) 0 units (c) 5 units (d) 2.5 units (e) none of these responses
14. Compute consumer’s surplus in the market for good x.
(a) $12.5 (b) $25 (c) $37.5 (d) $50 (e) none of these responses
15. At the price in question 11, the market for good x is efficient.
(a) true (b) false
16. The production function Q = ¾KL exhibits
(a) increasing returns to scale (b) constant returns to scale (c) decreasing returns to scale
Explanation / Answer
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11. (a) P = $5. Set the demand curve P equal to marginal cost MC and you get 10 - Q = Q. Solve for Q and you get 10 = 2Q > Q = 5. Now take this quantity and plug it into the demand function and you will get 10 - 5 = $5 for the price.
12. (c) P = $8.33. Set the demand curve P equal to MC (using the new MC). 10 - Q = 5Q > 10 = 6Q > Q = 10/6 = 1.67. Plug this into the demand function to get 10 - 1.67 = $8.33.
13. (e) none of these. As determined in the previous question, they will produce 1.67 units.
15. (b) false. If we can make the same amount of money by only selling 1.67 units, we should do that because it's less work for us.
16. (b) increasing returns to scale. Just look at the exponents, if they add up to 1, the returns are constant. Less than greater than 1 = increasing. In this case, they add up to 2.