P7.

a) mr = 10-2x and mr = 410-2x = 4X = 3So, the firm’s output level = 3

b) tr = 21, x = 3p = 21 / 3 = 7So, the firm’s price = $7

c) Short-run average total costs stands at its minimum point, that’s why it equals to mcmc = mr = 4So, short-run average total costs = $4

d) Total cost = average total costs * output levelTotal cost = $4 * 3 = $12

e) As it was mentioned before, mc = mr = 4 according to profit maximization

f) Short-run profit = total revenue – total cost Short-run profit = $21 - $12 = $9

P8.

a) The profit-maximizing output for Calypso (where mr = mc) equals 2 cubic feet a day. The price equals 6 cents per a cubic foot. Producer surplus = 8 cents, consumer surplus = 4 cents, deadweight loss = 4 cents.

b) If Calypso is regulated to make zero economic profit, they produce the output level, where price = average total cost (D curve and ATC curve intersection). Calypso produces 3 cubic feet a day at 4 cents per a cubic foot. Producer surplus = 6 cents, consumer surplus = 4 cents, deadweight loss = 1 cent.

c) Calypso produces the quantity where price = marginal cost (D curve and MC curve intersection). Calypso produces 4 cubic feet a day at 2 cents per a cubic foot. Producer surplus = 0, consumer surplus = 16 cents, deadweight loss = 0.

P9.

a) b) The Nash equilibrium for both AAA and BBB is to expand production. If BBB limits its production,

AAA generates larger profit if AAA will expand its production. If BBB expands its production, AAA generates larger profit if AAA will expand its production. It also relates to BBB in the same way.

c) AAA and BBB reach cooperative equilibrium to limit production if they use trigger strategy.