Suppose you are given the following information about a particular perfectly com

Question

Suppose you are given the following information about a particular perfectly competitive industry Q-= 6500-100PMarket demand Q-=1200P Market Supply CQ 722 (Q)/200Firm's total cost function Assume all firms in this perfectly competitive industry are identical. Find the equilibrium price and the equilibrium quantity for the entire industry, the output supplied by the firm, and the profit of each firm. (10 pts a) b Would you expect to see entry into or exit from this industry in the long run? Explain. What effect will entry or exit have in market equilibrium?

Explanation / Answer

a).

Consider the problem, here the demand curve be, “Q = 6500 – 100*P” and the supply curve be “Q=1200*P”. So, at equilibrium Qd=Qs, => 6500 – 100*P = 1200*P, => 1300*P = 6500, => P=5.

So, at P=5, Q=6,000:.

Now, the individual cost function of a firm is given by, “C=722 + (q^2)/200, MC=(2/200)*q,

=> MC = q/100, be the MC of the individual firms.

So, the individual firms will determine their optimum output by P=MC.

So, P=MC, => 5=q/100, => q=5*100 = 500.

So, optimum output be q=500.

So, the industry price and output combination is given by “P=5” and “Q=6000” and the individual firm’s out choice is q=500.

So, the profit of each firms be, “P*q – C, => 5*500 – 722 - (500^2)/200 = 1778 – (2,50,000)/200,

b).

So, as we can see that all the existing firms are getting positive profit, => we can expect in the LR few firms will enter in to the industry. So, the new firms will enter the industry, leads to increases in the market supply at t he given price level. So, the industry supply curve will shift to the right ward side to the price level start falling and the equilibrium “Q” will also increase.

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