Suppose the current demand for a product X is P Q Demanded $14 20000 15 18000 16
ID: 1254573 • Letter: S
Question
Suppose the current demand for a product X isP Q Demanded
$14 20000
15 18000
16 16000
17 14000
18 12000
19 10000
20 8000
21 6000
22 4000
23 2000
24 1000
The industry is perfectly competitive, consisting of 2000 identical firms. Each firm has a fixed costs of $2 and the following variable cost schedule:
q VC
0 0
1 15
2 20
3 35
4 51
5 68
6 86
7 105
8 125
9 146
10 168
(a)What is the equilibrium price of product X? What is the profit maximizing output for the firm? What is the value of profits for the firm?
(b)If the government decides to levy an annual license fee of $15, what will be the new equilibrium price after tax is imposed?
Explanation / Answer
1.equilibrium price is when market demand = market supply
by plotting price vs quantity demanded we can get the market demand curve
draw the market supply curve by multiplying 2000(no of firms) with quantity (1-10)
pt of intersection of these two curves is equilibrium price
2.profit is maximized when marginal revenue = marginal cost
marginal revenue is the revenue from one extra unit
marginal cost is the cost of producing one extra unit
since only variable cost varies marginal cost for each quantity = variable cost of that quantity- variable price of previous quantity
marginal revenue here =equilibrium price (perfect competition)
plot MR vs MC .pt of intersection gives the profit maximizing quantity
value of profit at that quantity = total revenue at that quantity - avg total cost at that quantity
quantity*price - quantity*(variable cost+fixed cost at that quantity)
3.If the govt imposes a tax on seller,the supply curve shifts upward by the same mnt.in this case it shifts by 15 upward.this upward movement covers the additionl marginal cost becuse of tax.New supply curve is obtained.demand curve is the same.pt of intersection is the new equilibrium price
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