Problem sets for Microeconomics II [110051-0471]

c. A public interest group supports the subsidy, arguing that it helps consumers
and producers alike. Economists oppose the subsidy, declaring that it leads
to an inefficient level of output. In your opinion, which side is correct
Explain carefully.
Exercise 5.4. Until recently, the market for air travel within Europe was highly
regulated. Entry of new airlines was severely restricted, and air fares were set
by regulation. Partly as a result, European air fares were and continue to be
higher than U.S. fares for routes of comparable distance. Suppose that, for a given
European air route (say, London to Rome), annual air travel demand is estimated
to be Q = 1, 500 − 3P, where Q is the number of trips in thousands and P is
the one-way fare in dollars. In addition, the long-run average (one-way) cost per
passenger along this route is estimated to be $200.
a. Some economists have suggested that during the 1980s and 1990s there was
an implicit cartel among European air carriers whereby the airlines charged
monopoly fares under the shield of regulation. Given the preceding facts,
find the profit-maximizing fare and the annual number of passenger trips.
b. In the last five years, deregulation has been the norm in the European market,
and this has spurred new entry and competition from discount air carriers
such as Ryanair and easyJet. Find the price and quantity for the European
air rout if perfect competition became the norm.
Exercise 5.5. Demand for microprocessors is given by P = 35 − 5Q, where Q is
the quantity of microchips (in millions). The typical firm’s total cost of producing
a chip is C i = 5q i , where q i is the output of firm i.
a. Under perfect competition, what are the equilibrium price and quantity
b. Under perfect competition, find total industry profit and consumer surplus.
c. Suppose that one company acquires all the suppliers in the industry and thereby
creates a monopoly. What are the monopolist’s profit-maximizing price and
total output
d. Compute the monopolist’s profit and the total consumer surplus of purchasers.
e. Discuss changes between your answers in parts b. and d.
Exercise 5.6. Suppose that, over the short run (say, the next five years), demand
for OPEC oil is given by Q = 52.5 − 1.25P. (Here Q is measured in millions of
barrels per day.) OPEC’s marginal cost per barrel is $10.
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