Be sure to explain what you are doing and show your work in the numerical problems, and provide a brief but complete answer to the discussion questions. Each part of a problem is weighted equally. Be sure to express the appropriate units for your answers. You should draw graphs for each problem to help guide your analysis.
1. The market for tortillas is perfectly competitive, with market demand given by p = 1-.00002Q, with price in dollars per tortilla and Q in thousands of tortillas. The short-run marginal cost curve for a typical tortilla factory is MC = 10 + .0005q with MC in dollars per tortilla and q in thousands of tortillas.
The fixed cost of running a factory is $15,000 per firm.
(a) If there are 50 identical factories, determine the short-run aggregate supply function.
(b) What is the market equilibrium quantity of tortillas, and what is the equilibrium price?
(c) At this output level, what is the typical factory's producer's surplus?
(d) What is the typical factory's profit?
2. There is only one least-cost way to make wooden boxes for shipping tomatoes, and any firm that makes them has a cost function given by TC = 250 + q+.004q² The inverse market demand for boxes is given by= 8 -.001Q. There is currently only one firm in the industry and it is able to act as a monopolist by a special governmental zoning rule.
(a) What is its output and what price does it charge for boxes?
(b) What is the firm's profit at this output level?
(c) Does the firm have any producer's surplus? Support your answer by calculating it.
(d) What is the magnitude of consumer's surplus in this situation?
3. Suppose now that the firm in problem 2 can no longer exclude others from using the same technology and producing boxes, so the market structure changes from monopoly to perfect competition. (That is, assume that all firms are price-takers and that they produce at minimum average cost in equilibrium.)
(a) What will the market price and quantity be?
(b) What is the magnitude of consumer's surplus under this market structure?
(c) What are the magnitudes of aggregate producer profits and producer's surplus?
(d) Comparing the two market structures for this industry, which has a larger social surplus (sum of producer's and consumer's surplus)?
4. The elasticity of demand in the local hardware industry is -1.5, while in the video market it is -4. Which industry has a higher markup over marginal cost (as a percentage of price)? In answering, calculate the markup for each.
5. The local bottled water supplier sells water for $0.50 per gallon, while marginal cost is $0.20 per gallon. What is this firm's degree of monopoly power, as measured by the Lerner index?
6. What is a network externality? And why might goods that exhibit this externality be more likely to be provided by monopoly suppliers?

Be sure to explain what you are doing and show your work in the num...