Suppose That All Firms in a Constant-Cost Industry Have the Following

question 69

Essay

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?

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Definitions:

Special-Interest Effect

The Special-Interest Effect is a phenomenon where a small group of individuals or entities, due to their strong interest, can influence legislation or regulations disproportionately to their size or importance in society.

Invisible Hand

A term coined by Adam Smith to describe how individuals' pursuit of self-interest in free markets leads to economic benefits for society as a whole.

Majority Voting System

A voting system in which decisions are made based on the preference of more than half of the voters, commonly used in elections and other decision-making processes.

Public Good

A good that is non-excludable and non-rivalrous, meaning individuals cannot be effectively excluded from use and where use by one individual does not reduce availability to others.