Question

The daily market demand for paper clips in the United States is QD = 10 – 2P. The daily market supply for paper clips is QS = 5 + 3P, where P is the price of a box of paper clips and QD and QS are thousands of boxes of paper clips. There are many producers and buyers of paper clips, selling them in boxes containing 200 paper clips.

a. Adam Smith Pins produces and sells paper clips. Adam Smith Pins marginal cost for producing paper clips is MC = 0.2 + 0.0025q, where q is the actual number (not thousands) of boxes of paper clips Adam Smith Pins produces and sells. Adam Smith Pins average variable cost for producing paper clips is AVC = 0.2 + 0.0001q. Adam Smith Pins daily fixed cost for producing paper clips is $200.

i. What price does Adam Smith Pins charge for their paper clips? (1 point)

ii. How many boxes of paper clips does it sell per day? (1 point)

iii. How much profit per day does Adam Smith Pins make from producing and selling their paper clips? (1 point)

iv. Should Adam Smith Pins continue producing and selling paper clips? (1 point)

b. The Chinese, Indians, and French have all shared a new technology to produce paper clips, and flood the world market with paper clips selling for $0.70 per box worldwide. Should Adam Smith Pins continue to produce paper clips? Provide your economist’s reasoning why or why not? (2 points)

c. Adam Smith Pins is purchased by Jared Kushner. He convinces President Trump to give Adam Smith’s Pins the monopoly on making paper clips in the United States and to prohibit the import of any foreign paper clips, especially those made in China, India, and France. As an economist for Adam Smith’s Pins you calculate that marginal revenue in the paper clip market is MR = 20 – 0.0003q, where q is the number of paper clips Adam Smith’s Pins produces.

i. What is the new market price and how many paper clips are now sold in and purchased by the market each day? (Note: Adam Smith Pin’s production is the actual number and the quantity demanded by the market is in thousands) (2 points)

ii. How much profit does Adam Smith Pins make per day? (1 point)