# Problem Set 1

Please write your answers to the following questions on a piece of paper, or download and print a PDF copy (link above) to write on. You may also type your answers and print out a hard copy.

Answer all of the following questions briefly (1-3 sentences). Use examples as necessary. Be sure to label graphs fully, if appropriate. For calculation problems, please show all work. Simply writing the answer, even if correct, may result in loss of points.

You may work together (and I highly encourage that) but you must turn in your own answers. Your TA, under my supervision, will grade homeworks 70% for completion, and for the remaining 30%, pick one question to grade for accuracy - so it is best that you try every problem, even if you are unsure how to complete it accurately.

## Competitive Markets

### Question 1

In a competitive industry, why are economic profits normal (zero) in the long run? What about if firms are not identical, and have different costs?

### Question 2

#### Part A

Suppose it must charge a single price to all customers. Find the profit-maximizing quantity, price, and the total profits.

#### Part B

How much of the price is markup?

#### Part C

What is the price elasticity of demand at this price?

#### Part D

Now suppose the firm is able to segment the market and charge different prices to Tourists and Locals. Find the profit-maximizing quantity, price, and the total profits.

#### Part E

For each segment of the market: how much of the price is markup, and what is the price elasticity of demand at the optimal price? How did the price for each segment change from the single price (Part A), and why?

## Factor Markets & Monopsony

### Question 8

Carl’s Coal Mining operates in a remote area. Because of its location, it has monopsony power in the local labor market for miners. Its marginal revenue product of labor is $MRP_L = 400-5L$ where $$L$$ is the total number of miners. The labor supply curve of local miners is $w = 5L-50$ where $$w$$ is the wage (in \$1000’s per miner).

#### Part A

Write a function for the marginal cost of labor.

#### Part B

What quantity of workers will the mine hire, and what wage will it pay its workers?

#### Part C

What would the quantity of workers be, and what would the wage be, if there was competition among other local mines for labor?

#### Part D

Sketch a graph of this market, and be sure to label all of your findings (and show the Deadweight Loss) from Parts A-C.