The global Propylene industry is perfectly competitive and each producer has the

Question

The global Propylene industry is perfectly competitive and each producer has the marginal cost function MC = 40-12q+q2 . The corresponding average cost function is AC=40-6q+1/3q2. The market demand curve for propylene is Q=2200-100P.

1. what is the long-run equilibrium price in this industry?

2. At this price, how much would an individual firm produce? Explain

3. How many active producers are in the propylene market in a long-run competitive equilibrium? Explain

4. How much profit an individual producer is making? Explain.

Explanation / Answer

1. equilibrium is attained when P=Ac, with zero economic profit

22-q/100 = 40-6q +1/3q2

Q=9

q= 9, substituting this in the above equation we get, P=

P= 40-12q+q2 = 40 - 12*9 - 9^2 = 13

P= 13

2. At this price of 13, firm will produce 9 units.

3. Market demand curve Q= 2200- 100*13 = 900

Each firm will produce 9 units, hence market will have 100 firms

4. Profit = TR- TC = P*Q- TC = 9*13 - (40-6q+1/3q2)*q = Zero

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