MGEC41H3
Industrial Organization
Winter 2025
Problem set 1 – Due: January 31, 2025
This problem set is worth a total of 100 points. You should complete the assignment individually and
upload it on Quercus. If you work in groups, write the names of your group members on the front page of
your answer sheets. If you are late in turning in your work by 24 hours, you lose 15% of your grade. If you
are late in turning in your work by 48 hours, you lose 30% of your grade. If you turn in your assignment
after 48 hours from due date and time, you get 0 for that assignment.
Question 1 (25 points)
Suppose there are 6 firms competing in a perfectly competitive market characterized by demand D(p) =
144 − 3P . All firms have the cost function C(q) = 32q2 + 3q + 272 . Firms simultaneous decide how much
output to produce.
(a) (13 points) Suppose all firms interact in a perfectly competitive market. What is the equilibrium price
and quantity?
(b) (12 points) Suppose there are several other firms that can freely enter or exit the market in the long-run,
and they have the same cost function C(q) = 32q
2 + 3q + 272 . What is the long-run equilibrium?
Question 2 (15 points)
Consider the same market characterized by demand Q = 144− 3P , but now there is only one firm supplying
to the entire market. This firm has the same cost function C(q) = 32q
2 + 3q + 272 and decides how much
output to produce.
(a) (7 points) What is the equilibrium price and total quantity for the monopoly case?
(b) (3 points) What are the monopolist’s markups (% of marginal costs) at the equilibrium?
(c) (5 points) What is the consumer surplus associated with the monopoly equilibrium?
Question 3 (35 points)
Consider a market with inverse demand given by p(Q) = 30− Q2 . Suppose the only potential supplier in the
market is choosing whether to enter the market. If it enters, it will have costs given by C(Q) = Q2 + F ,
where F > 0.
(a) (10 points) For what values of F will the firm enter?
(b) (15 points) Suppose F = 145. What is the total market welfare in the economy if the company operates
as a monopoly?
(c) (10 points) Consider the case in (b). What are the welfare gains of the monopoly? Compare them to
the welfare gains of a perfectly competitive market for this economy. Does the market benefit from the
firm operating as a monopoly? Explain.
1
Question 4 (25 points)
Consider an industry where firms have the following cost function: C(q) = 200 + 20 ∗ q+ 0.02 ∗ q2 Consumer
Demand is given by: P (Q) = 100–0.02 ∗Q
(a) (10 points) Work out the equilibrium price and quantity if you are told that the industry is a monopoly.
(b) (8 points) What is the price elasticity of demand at the market equilibrium?
(c) (5 points) What is the monopolist markup?
(d) (2 points) What is the Lerner Index?