1. Suppose you are given the following information about a particular industry:

Question

1. Suppose you are given the following information about a particular industry:

Market Demand: QD = 6500 – 100P and Market Supply: QS = 1200P

Firm Total Cost Function: C(q) = 1500 + q2/200

Assume that all firms are identical, and that the market is competitive.

a.Find the equilibrium market price and quantity, and the firm’s output and profits.

b.Would you expect to see entry into or exit from the industry in the long-run? Explain. What effect will entry or exit have on market equilibrium?

c.What is the lowest price at which each firm would sell its output in the long run? Is profit positive, negative, or zero at this price? Explain.

d.What is the lowest price at which each firm would sell its output in the short run? Is profit positive, negative, or zero at this price? Explain.

Explanation / Answer

ans1

a)

for market equilibrium price and quantity

QD= 6500-100P

QS = 1200P

6500-100P =1200P

6500 = 1300P

P=5

Q =6500-100(5) = 6000

now price will be given for firm

and firm equilibrium will be dertermined where

P= MC

C(q) = 1500 + q2/200

MC=dTC/dq = q/100

q/100 = 5

q=500 i firm's profit

firm's profit = TR-C   = P*q   - (1500 + (250000/200) =   5*500 - (1500 + (250000/200) = 2500-1500 -1250 = -250

b) yes i expect exit from the industry in the long run because firm is incurring losses or negative profit. due to exit of few firms, supply will decrease in industry and prices will increase and negative profit will disappear

c) lowest price at which firm would sell in long run is where P=ATC= MC that is where ATC is minimum and equal to MC

for this we have to minimise ATC

ATC =C/q= 1500/q   +q/200

dATC/dq = -1500/q2 + 1/200 =0

                       1500/q2 = 1/200

q2 = 1500*200

q= 547.7

lowest ATC at q= 547.7

ATC =C/q= 1500/q   +q/200 = 1500/547.7     + 547.7/ 200 = 2.73+ 2.73 = 5.5(approx)

P= 5.5 is lowest price at which each firm would sell its output in the long run. at this price profit will be zero

d)for short run

owest price at which firm would sell in short run is where P=AVC= MC that is where AVC is minimum and equal to MC

for this we have to minimise AVC

TVC= q2/200

AVC= TVC/q = q/200

for minimum

dAVC/dq =1/200

no result found but it will be at minimum point of AVC

at this point firm will earn negative profit and producw until P> or = to AVC and stop producing if P<AVC

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.