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(f) A representative consumer has a utility function U (x, y) = xy. A representative firm...

(f) A representative consumer has a utility function U (x, y) = xy. A representative firm makes

good x and has a production function x = f(k, l) = (kl)0.25and an unavoidable fixed cost

equal to A. There are 100 consumers and, initially, 100 firms. Prices are w = v = Py = 1 and Px is determined in a competitive market. Representative consumer income is I = 2.

In the long run,the number of firms is M

(determined endogenously),

and is a variable.

Assume M stays at 100 & capital isn’t fixed.

(f) Find equilibrium price and quantity?

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Answer #1

Eauiioriun Muz Muy Pr Py Bndget 2= 22px Marckut demamd frm x: Pro dnction fn a MP MPK Eauiibrium 25 -075 C A wA k Cost A +t AC- A 2 2 x2 A or,C :. MC 4 Eaui ibriun ong supply of each firm Tun AR . 4 MPZ eami ibrium. Mz ス=1 2. = 50

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