Question

1. The market for tortillas is perfectly competitive, with market demand given by p 1-.000020, with price in dollars per tortilla and Q in thousands of tortillas. The short-run marginal cost curve for a typical tortilla factory is MC = .10 + .0005g.with MC in dollars per tortilla and q in thousands of tortillas. The fixed cost of running a factory is $15,000 per firm. (a) If there are 50 identical factories, determine the short-run aggregate supply function. b) What is the market equilibrium quantity of tortillas, and what is the equilibrium price? (c) At this output level, calculate the typical factory's producer's surplus. (d) Calculate the typical factory's profit. price? frpical factory's producer's surphus

Answer 1

Perfect compt MKt dd: P = 1 - .0002Q. Rising segment of Rim�s Mc above Min of Avc is firm�s short Run ss func^n - so ss curve P = .1 + .0005q, Mkt ss curve is horizontal summation of Individual ss fun^c, so SR Mkt ss curve: Q^s = sigma q_i = 50[P - .1/.0005] = 100,000[P - .1] so Q^s = 100,000P - 10000 at Mkt eq^n, dd = ss thus 1 - .0002Q = Q + 10000/100,000 so 100,000 - .00002Q/100,000 times 100,000 = Q + 100,000 90,000 = 3Q Q* = 30,000 rightarrow Mkt o/p thus eq^n o/p = 30,000, eq^n P = 1 - .6 = .4, P = .4$ Now P middot S = 1/2 [.4 - .1] times 30,000 = 3/10 times 15,000 = 15,00 \r\n Now each firm produces = 30,000/50 = 600 units, TFC = 15,000 TR = 600 times .4/10 = 240$, TVS = integral MC = .1q + .0005/2 (q^2)