1)True or False: If a nation has a large enough share of the world market for one of its imports, then the country can change the world market of that product. This is called monopsony power.

2)Suppose a market is characterized by an inverse demand curve P(Q) = 100 - 4Q. All firms in the market are identical. Each firm faces a long-run total cost function TC = 20 + 5Q + 4Q[Math Processing Error]2, with corresponding marginal cost MC = 5 + 8Q.

a. What does the 20 represent in the long-run total cost function?

b. Determine the long-run equilibrium price and quantity (given that there are free entry and exit in the long-run).

c. Determine consumer and producer surplus.

d. Re-do parts b. and c., except that instead of perfect competition, the market is characterized by a monopolist. (The marginal revenue curve associated with inverse demand is MR = 100 - 8Q.)

1)The correct answer is true.

1. It is true to say that if a nation has a large enough share of the world market for one of its imports, then the country can change the world market for that product, and this is called monopsony power.

A monopsony is a market structure characterized by the following:

• Single buyer- there is only one consumer for the product being sold. The buyer has full control of the demand side of the commodity.
• Barriers to entry- there exist barriers to potential entrants in the market such as patents and copyrights and vast initial capital requirements.
• Market power- a monopsony can set and maintain both the price and the demand level for the commodity in question.

2)

a).

Given that;

[Math Processing Error]P(Q)=100−4QTC=20+5Q+4Q2MC=5+8Q

The 20 on the cost function represents the fixed cost incurred by the firm.

b).

The perfect competition's supply curve is the marginal cost above the average total cost:

[Math Processing Error]P=MC=5+8Q5+8Q=100−4QQ=7.92P=$68.36

The market output and price are 7.92 units and $68.36, respectively.

c).

Consumer surplus is the area of a triangle below the demand curve, but above the equilibrium price:

[Math Processing Error]CS=12(max. price−Equilibrium price)Quantity=12(100−68.36)7.92=$125.29

Producer surplus is the area of a triangle below the equilibrium price line, but above the supply curve:

[Math Processing Error]PS=12(Equilibrium price−Choke price)Quantity=12(68.36−5)7.92=$250.91

The producer and consumer surpluses are $250.91 and $125.29, respectively.

d).

The monopolist produces at a point where the marginal revenue is equal to the marginal cost:

[Math Processing Error]MR=MCP=100−4Q100−8Q=5+8QQ=5.94P=$5.94CS=12(100−76.25)5.94=$70.54PS=12(76.25−5)5.94=$211.61

The monopolist output and price are 5.94 and $76.25, respectively. The consumer and producer surpluses are $70.54 and $211.61, respectively.