Waldman/Jensen – Industrial Organization Theory and Practice, Fourth Edition
Solutions to Even Numbered Problems
Chapter 3
Problem 2:
a. The firm sets P = MC. 50 = 2q+30; q=10. Because we only are given one of many
SRTC functions, we don’t know the LRTC function, and therefore, we cannot determine
the LR equilibrium price. It’s probably not $50, but we can’t know for sure what it is
from the information given in this question.
b. The short-run supply function is simply the MC curve above minimum AVC. AVC =
q+30. This curve hits a minimum when q=0. Thus, the firm’s short-run supply function is
simply: P = 2q + 30.
Problem 4:
a. Firm sets P = MC. 2q=60; q = 30
b. Profits = TR – TC = 60*30 – (302 +100) = 1800 – 1000 = 800
c. Short-run supply is MC above minimum AVC. In this case, P = 2q
d. The industry supply curve is calculated by summing each individual firm’s short-run
supply curve. qi = P/2. Q = 100 (P/2) = 50P. The formula for the industry supply curve
is: P = Q/50.
Problem 6:
a. Set QD = QS. 100 – P = -50 + 2P; 3P = 150; Pe = 50; Qe = 50
b. Consumer Surplus = ½ (100-50)*50 = 1250
Producer Surplus = ½ (50-25) * 50 = 625
Problem 8:
a. MR = 55 – 4Q
b. set MR = MC; 55 – 4Q = 2Q – 5; Q = 10; P = 55 – 2(10) = 35
c. Profits = 35(10) – [102 – 5(10) + 100] = 350 – 150 = 200
d. Consumer Surplus is shown graphically in Figure 3A.1 as triangle area ABC
Consumer Surplus = ½ (55-35) (10) = 100
e. P = MC; 55-2Q = 2Q – 5; Q = 15; P = 25
f. Profits under perfect competition = 25(15) – [152 – 5(15) +100] = 375 – 250 = 125
Consumer Surplus under perfect competition is shown graphically in Figure 3A.1 as
triangle area AEG. Consumer Surplus = ½ (55-25) *15 = 225
Chapter 3
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Waldman/Jensen – Industrial Organization Theory and Practice, Fourth Edition
Solutions to Even Numbered Problems
g. Deadweight Loss is shown graphically in Figure 3A.1 as the triangle BEF.
Deadweight Loss = ½ (35-15) * (15-10) =50
FIGURE 3A.1
Problem 10:
As indicated in Figure Problem 3A.2, without trade the equilibrium price and quantity
are:
Demand = 100 - qUS = 25 + qUS = Supply
solving for qUS yields qUS = 37.5
P=100-qUS=62.5
Chapter 3
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Waldman/Jensen – Industrial Organization Theory and Practice, Fourth Edition
Solutions to Even Numbered Problems
Figure 3A.2
With trade the total supply curve is the sum of the US supply and the foreign
supply in the United States:
1
qUS = P - 25 and q f = P - 12.5
2
1
3
 qtotal = qUS + q f = (P - 25) + ( P - 12.5) = P - 37.5
2
2
3
2
 P = 37.5 + qtotal  P = 25 + qtotal
2
3
Chapter 3
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Waldman/Jensen – Industrial Organization Theory and Practice, Fourth Edition
Solutions to Even Numbered Problems
The equilibrium with trade:
2
Demand = 100 - q = 25 + q = Supply
3
5
q = 75  q = 45
3
With trade, q=45, P=55.
Welfare changes to the United States as a result of free
trade are identified below.
Consumer surplus without trade was:
1
2
CS w/o trade = ( 37.5 ) = 703.125
2
Producer surplus without trade was:
1
2
PS w/o trade = (37.5 ) = 703.125
2
Without trade, CS + PS = 703.125 + 703.125 = 1406.25
Consumer surplus with trade is:
1
2
CS w/ trade = ( 45 ) = 1012.5
2
The domestic firms' producer surplus with trade is:
1
2
PS w/ trade = (30 ) = 450
2
With trade, CS + PS = 1012.5 + 450 = 1462.5
The net welfare gain to the United States from trade (which graphically equals the area of
the dark gray triangle in Figure 3A.2) is:
1462.5 - 1406.25 = 56.25
Chapter 3
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Waldman/Jensen – Industrial Organization Theory and Practice, Fourth Edition
Solutions to Even Numbered Problems
Problem 12:
a. Even though the land is already paid for, it still has value. Thus, the investment
includes the explicit cost of $300,000 as well as the implicit opportunity cost (the value
of the land) of $50,000.
b. Build the building! At an interest rate of 7%, $350,000 invested today would be worth
350,000(1.07) = $374,500 in one year. So, selling the office building for $400,000 one
year later would be a good investment. Or, using present discounted value, the receipt of
$400,000 in one year from now has a present discounted value of $400,000/(1.07) =
$373,831.78. Given the office building costs less than that, it would be worth building the
office building.
c. Don’t build the building! At an interest rate of 15%, $350,000 invested today would be
worth 350,000(1.15) = $402,500 in one year. So, selling the office building for $400,000
one year later would NOT be a good investment. Or, using present discounted value, the
receipt of $400,000 in one year from now has a present discounted value of
$400,000/(1.15) = $347,826.09. Given the office building costs more than that to build, it
would not be worth building the office building.
As the interest rate increases, the present discounted value falls.
Chapter 3
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