ECON 342 ECON342 Homework 3 with Answers (Penn State University)
ECON 342 ECON342 Homework 3 Answer (Penn State University)
1. (18 total points) Suppose there are 5 firms located equidistantly around a circle whose circumference is equal to 1. There are 100 consumers distributed uniformly around the circle. Each consumer gets utility U = 6 from buying a unit of the good from a firm which sells their ideal brand (a firm located at the consumer’s location). Also, the consumer’s utility decreases by 5 times the distance that the consumer is located from the firm. So a consumer who buys from firm i gets utility given by Ui = 6 – 5xi where xi is the distance from the consumer’s location to firm i’s location. The consumer’s surplus from purchasing a unit of the good from firm i is the difference between their utility from purchasing a unit of the good from firm i and the price that firm i charges. So CS = Ui – Pi. Also, the consumer has no alternatives, so the consumer will buy a unit of the good if maximum surplus gained from purchasing from any firm is greater than 0.
2. (15 total points) Suppose that, assuming a firm decides to produce a product, it must build a production facility. The fixed cost of this facility is F = 90. Also, the firm has constant marginal cost, MC = 5. Demand for the product that the firm produces is given by P = 40-5Q.
Assume the marginal cost of production is constant and MC = 4, and there are no fixed costs.
