Principles of Economics W1105.

002

Spring 2013

Prof. Musatti Section Number_____________________

Student Name: _______________________ UNI __________________________

Problem Set 4 Due: Thursday, March 7th 2013

General Problem Set Guidelines 1. The problem sets are due at the beginning of lecture. No late problem set is accepted under any circumstance. 2. Please, write legibly and submit your solutions on 8 x 11 paper. 3. Make sure you write your name, UNI and section number on the top page of your solution set. Problem sets will be returned in the section indicated. Problem sets with no section indicated will be left in the course mailbox in room 1022 IAB. 4. You do not need to attach a copy of this sheet, but please staple pages together if your solution set contains multiple sheets. 5. Problem sets are graded on a + (5 points), (3 points), - (1 point) or 0 basis. Solution sets will be posted on courseworks. 6. While you are free to discuss with classmates, you must submit your own solutions. Simply copying another students work is cheating. Columbias policy on academic integrity is at http://www.college.columbia.edu/bulletin/universitypolicies.php. # 10 11 12 13 14 Section Day Monday Monday Monday Monday Monday Section Time 11:00-11:50a 10:00-10:50a 5:10-6:00p 6:10-7:00p 7:10-8:00p # 15 16 17 18 19 Section Day Thursday Thursday Thursday Thursday Friday Section Time 3:10-4:00p 4:10-5:00p 3:10-4:00p 4:10-5:00p 1:10-2:00p

1. True/False? Justify your response. If there were no diminishing marginal returns, all the rice humans wish to eat could be grown in a single flowerpot. 2. Suppose that the NYC pizza industry is perfectly competitive. All pizza restaurants have similar cost curves and the industry is currently in long-run equilibrium, with each pizza restaurant producing at its minimum average cost of $2.50 per slice of pizza. a. If there is a sudden increase in the demand for pizza, what will happen to the price of a slice of pizza? How will individual pizza restaurants react to that change in price in the short run? b. For the market as a whole, do you expect the quantity of pizza to change by a larger amount in the short or in the long run? Why? c. If the increase in the demand for pizza is permanent, what do you expect will happen to the price of pizza in the long run? 3. In a fictional nation, BigPharma has acquired a monopoly on the production of an anti cancer treatment. The company faces the demand and cost situation shown in the table below. Price Quantity Total Revenue Marginal Total Cost Marginal Cost Revenue $1,200 0 $350,000 $1,000 1,000 $450,000 $ 800 2.000 $600,000 $ 600 3,000 $800,000 $ 400 4,000 $1,200,000 $ 200 5,000 $1,800,000 a. Briefly explain whether you think BigPharma is a natural monopoly. b. According to the data above, what is the efficient quantity of anti-cancer treatment? c. According to the data above, what is the profit maximizing quantity of anti-cancer treatment? d. Suppose the government imposes a price ceiling of $400 per dose of anti-cancer treatment. What quantity does the monopolist produce? What is the profit of the monopolist? What is the consumer surplus created by this market? e. Suppose the monopolist produces the profit maximizing quantity. What is the profit of the monopolist? What is the consumer surplus created by this market? 4. In 2011, Sony announced that it had lost money selling televisions for the seventh straight year. Given the strong consumer demand for plasma, LCD and LED television sets, shouldnt Sony have been able to raise prices to earn a profit? Briefly explain.