[TheJoelster]

1. The market demand function for good Q is: P = 10 – 0.5Q. The average cost of producing a unit of Q is constant and equals 2.

a) Assume the market for Q is perfectly competitive.
What is the equilibrium price? What is the equilibrium level of Q? How large are consumer surplus and producer surplus?
What is the equilibrium number of firms in this market when the industry is a constant cost industry?

b) Assume the market for Q is a pure monopoly. Find the equilibrium price, demand, consumer surplus, profit, and deadweight loss.

c) Which tax, when introduced in the competitive market, would lead to the same consumer surplus and the same deadweight loss as was obtained in the pure monopoly? How do profits in the monopoly market and tax revenues in the perfectly competitive market compare?