1. Consider a firm with the following production schedule and a fixed cost in th
ID: 1102621 • Letter: 1
Question
1. Consider a firm with the following production schedule and a fixed cost in the short run of 19. This fixed cost comes from using the unique quantity of the fixed input that minimizes LRAC. Assume all of the firms are identical firms in the long run and all the firms can only produce whole quantities (i.e., Q=3.5 not possible)
q -----------------------------VC
1 ------------------------------16
2 ------------------------------29
3 -----------------------------40
4 -----------------------------49
5 ----------------------------59
6 ---------------------------71
7 ---------------------------86
8 -------------------------106
a) Find the LR comp. eq. price, firm quantity, and market quantity if this LR equilibrium has 100 firms. (1 point) Assume there is a new market demand for this good that contains the following points:
P ------QD ----------------------------P ---------QD ----------------------P---------QD
8 ------700 ----------------------------13 -------600------------------- --18------- 500
9------ 680 ---------------------------14 ---------580-------------------- 19 --------480
10 ----660---------------------------- 15-------- 560--------------------- 20-------- 460
11----- 640--------------------------- 16 --------540 ---------------------21 --------440
12 -----620--------------------------- 17 -------520---------------------- 22--------- 420
b) Explain why, for this new demand, the LR price in (a) is no longer the SR equilibrium price. Use this analysis to find the new SRCE price, firm quantity, market quantity, and firm profit with this new demand function. (2 point
Explanation / Answer
a) Find the LR comp. eq. price, firm quantity, and market quantity if this LR equilibrium has 100 firms.
Long run price is the minimum of ATC and ATC is minimum at $15 when the quantity is 7. This implies tat long run competitive price is $15, each firm's quantity is 7 unit and market quantity is 100 x 7 = 700
b) Observe the values of AVC below. See that marginal cost rises after it cuts the AVC from below and this rising portion of the MC gives supply curve of thr firm
Beginning from q = 6, the market supply has three points, (price is equal to MC so we take MC as price and market quantity as 100 x individual quantity due to 100 firms operating)
P = 12, Q = 600, P = 15, Q = 700 and P = 20, Q = 800.
Note that the demand curve has P = 13 and Q = 600. The new price in the short run is therefore $13. firm's quantity is 60 and market quantity is 600. Profit by one firm is (13 - 15)*60 = -120.
Q VC FC TC ATC 1 16 19 35 35.0 2 29 19 48 24.0 3 40 19 59 19.7 4 49 19 68 17.0 5 59 19 78 15.6 6 71 19 90 15.0 7 86 19 105 15.0 8 106 19 125 15.6Related Questions
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