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The industry demand function for bulk plastics is represented by the following equation:
P = 800 – 20 Q
where Q represents tonnes of plastic. The total cost function for the industry, including “normal profit” (the return shareholders require to stay invested in the industry), is:
TC = 300 + 500 Q + 10 Q^2 and MC = 500 + 20 Q
a) If this industry acts like a monopolist in the determination of price and output,compute the profit-maximizing level of price and output and the industry profit.
b) Assume now that this industry is perfectly competitive, composed of many (500)small firms, and the cost function remains unchanged. What level of output would profit-maximizing firms produce? What profit would they make? How does the profit compare with that under monopoly? Explain.
c) If the competitive solution most accurately describes the industry, is the industry operating under equilibrium conditions? Why or why not? What would you expectto happen?
d) The Clean Water Coalition has proposed pollution control standards for the industry that would change the industry cost curve to TC = 400 + 560 Q + 10 Q2. What is the impact of this change on price, output, and total profits under the monopoly solution?
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