ECO 550 Check Your Understanding – Week 9

Chapter 16 Exercise 4, 6(a, c), and 9

4. What are the incentives to innovate for a monopoly firm as compared with a firm in a competitive market if patent protection is not available? 

6. The industry demand function for bulk plastics is represented by the following equation:

P = 800 – 20Q     where Q represents millions of pounds of plastic.

The total cost function for the industry, exclusive of a required return on invested capital, is     TC = 300+ 500Q + 10Q2      where Q represents millions of pounds of plastic.

    • If this industry acts like a monopolist in the determination of price and out-put, compute the profit-maximizing level of price and output.

  • Assume that this industry is composed of many (500) small firms, such that the demand function facing any individual firm is  P = $620

Compute the profit-maximizing level of price and output under these conditions (the industry’s total cost function remains uncharged).

9. Branding Iron Products, a specialty steel fabricator, operates a plant in the town of West Star, Texas.  The town has grown rapidly because of recent discoveries of oil and gas in the area.  Many of the new residents have expressed concern at the amount of pollution (primarily particulate matter in the air and waste water in the town’s river) emitted by Branding Iron.  Three proposals have been made to remedy the problem:

    • Impose a tax on the amount of particulate matter and the amount of waste water emitted by the firm.

    • Prohibit pollution by the firm.

    • Offer tax incentives to the firm to clean up its production processes.

Evaluate of these alternatives from the perspectives of economic efficiency, equity, and the likely long-term impact on the firm.