1. Suppose that all firms in a constant-cost industry have the
following long-run cost curve:
c(q) = 4q2 + 100q + 100
The demand in this market is given by QD = 1280 - 2p. Suppose the
number of firms in the market is restricted to 80
a. Derive the supply curve with this restriction. Find the market
equilibrium price and quantity with the restriction.
b. If firms are allowed to buy and sell these permits in an open
market, what will be the rental price of permits? Will firm’s that
own permits make profit? Briefly explain.
c. How much deadweight loss is generated by the permit system?
Provide a graph showing the region of this deadweight loss.
d. Suppose the government abandons the permit system and simply
imposes a fixed fee on firms in the market. If the fee is set equal
to the permit price you found in c., what will be the equilibrium
price, quantity, number of firms and deadweight loss?
Get Answers For Free
Most questions answered within 1 hours.