1. Suppose that the demand for pizza is given by Qd = 100 - 2P, where Qd is the

quantity demanded in slices per day and P is the price in dollars per slice. The supply

of pizza is given by Qs = 50 + 4P, where Qs is the quantity supplied in slices per day.

What is the equilibrium price and quantity of pizza in this market?

a) P = $5, Q = 70

b) P = $10, Q = 40

c) P = $7.5, Q = 55

d) P = $12.5, Q = 25

Answer: c) P = $7.5, Q = 55

Rationale: The equilibrium occurs where Qd = Qs, so we can set the two equations

equal to each other and solve for P: 100 - 2P = 50 + 4P, which implies P = $7.5. Then

we can plug this value into either equation to get Q: Qd = 100 - 2(7.5) = 55 or Qs = 50

+ 4(7.5) = 55.

2. Consider a market with two firms, A and B, that produce a homogeneous good. The

inverse demand function for the good is P = 120 - Q, where P is the price in dollars per

unit and Q is the total quantity in units. The marginal cost of production for each firm is

constant and equal to $20 per unit. Assume that the firms compete as Cournot

duopolists, i.e., they choose their quantities simultaneously and independently. What is

the profit-maximizing quantity for firm A?

a) QA = 20

b) QA = 25

c) QA = 30

d) QA = 35

Answer: b) QA = 25

Rationale: The profit function for firm A is given by πA = (P - MC)QA = (120 - QA - QB -

20)QA, where QB is the quantity chosen by firm B. To maximize profit, firm A sets its

marginal revenue equal to its marginal cost: MR = MC, which implies (120 - 2QA - QB)

= 20, or QA = 50 - (1/2)QB. Similarly, the profit-maximizing condition for firm B is QB =

50 - (1/2)QA. Solving these two equations simultaneously gives QA = QB = 25.

3. Suppose that a monopolist faces a linear inverse demand function P(Q) = a - bQ,

where P is the price in dollars per unit and Q is the quantity in units. The monopolist

has a constant marginal cost of c dollars per unit and no fixed cost. What is the

deadweight loss caused by the monopoly pricing compared to the socially optimal

pricing?

a) DWL = (a - c)^2 / (8b)

b) DWL = (a - c)^2 / (4b)

c) DWL = (a - c)^2 / (2b)

d) DWL = (a - c)^2 / b

Answer: a) DWL = (a - c)^2 / (8b)

Rationale: The monopoly quantity is determined by setting marginal revenue equal to

marginal cost: MR(Q) = MC(Q), which implies a - 2bQ = c, or QM = (a - c) / (2b). The

monopoly price is then PM = a - bQM = a - b(a - c) / (2b) =

(a + c) / 2. The socially optimal quantity is determined by setting price equal to

marginal cost: P(Q) =

MC(Q), which implies a - bQ* = c, or Q* =

(a - c) / b. The socially optimal price is then P* =