Suppose that all firms in a constant-cost industry have the following long-run cost
curve:
c(q) = 4q2 + 100q + 100
The demand in this market is given by QD = 1280 - 2p. Suppose the number of firms in
the market is restricted to 80
a. Derive the supply curve with this restriction. Find the market equilibrium price
and quantity with the restriction.
b. If firms are allowed to buy and sell these permits in an open market, what will be the
rental price of permits? Will firm’s that own permits make profit? Briefly explain.
c. How much deadweight loss is generated by the permit system? Provide a graph
showing the region of this deadweight loss.
d. Suppose the government abandons the permit system and simply imposes a fixed fee
on firms in the market. If the fee is set equal to the permit price you found in c., what
will be the equilibrium price, quantity, number of firms and deadweight loss?