QUESTION 8.1
Your data processing facility that was trying to decide between using an automated or
manual system is no longer able to maintain its monopoly (darn!). This is true because the market
has grown and shifted the demand curve to the right. The new market demand curve is:
$Q^d=360-3P$
You may recall that you were faced with a choice between the following two cost curves:
$TC_{manual}=200+2q^2$
$TC_{automated}=900+q^2$
Minimum efficient scale was achieved when $q=10$ and $q_{automated}=30$. All other entrants will
have the same choices between manual and automated data processing centers.
a. Will all the firms in this market use the automated or manual option in the long-run? Why?
b. Using your answer from part a, how many firms will be in this market? N
c. What is the HHI for this market? N
d. If labor costs increase such that the new total cost function for the manual option is
$TC_{manual}=200+8q^2$, what is the new minimum efficient scale for firms in the market? (Note:
Assume firms choose the most efficient option.) N What is the long-run HHI for the market
now? N
QUESTION 8.2
If a firm's Marginal cost curve is denoted by $MC = 2q$, then what is the supply curve for a
market with eight firms?
QUESTION 8.5
Suppose that President Clinton has recently recommended that the U.S. should use some
of the strategic oil reserves (oil stored underground and owned by the United States government)
in order to solve the U.S. oil supply problem. Assume that quantity demanded in the short-run is
inelastic at 1 million barrels per day. The quantity supplied (per day) is equal to 700,000 + 10,000P
(where P is the price for a barrel of oil).
a. What would be the current price for a barrel of oil? N
b. If Clinton releases 100,000 barrels per day, what is the new equilibrium price and quantity?
N
c. Presidential candidate George W. Bush proposed that all states lower their gasoline tax.
Assume that the gasoline tax reduction leads to a $10 decrease in the tax on a barrel of oil
(i.e., supply side). What is the new price and quantity? N How much of the tax savings
will be passed on to consumer through lower prices? Assume that the changes in part b.
have not occurred.
d. What impact do each of these two proposals in b. and c. have on revenues?
