Question

1. Suppose the market for canola oil is perfectly competitive. There are 1.000 firms in the market, each of which have a fixed cost of FC = 2 and a marginal cost of MC = 1 + q, where q is the quantity produced by an individual firm. Let Q. denote the total quantity supplied in the market. The market demand for canola oil is given by Qd = 15, 250 - 250P. a) Find the market supply equation, that is write Q, as a function of price P. b) What is the equilibrium price? What is the equilibrium quantity of canola oil bought and sold? How much profit is a given firm making (if any)? Are firms profit maximizing at this equilibrium? Show your calculations. c) Can you tell whether this is a long-run equilibrium? If not, how would a long-run equilibrium be different? d) How would an increase in demand for canola oil affect the quantity produced by each firm in the short-run? How would it affect their profits in the short-run? Use a supply-and-demand diagram to sup- port your answer.

Answer 1

alma as Mc-itg ad=15250-2509 P=1+q Eme is the supply nowe] a = P_ I a nce there are 100 o firms Qs =-1000+1000P 5 QD=15250-250P - solving 0 0 ~1000 + 1000P - 15250-2500 280p 16280 P=16250 13 4 [0= 12000 & each frim produces 12 unit. Profit of each from = 13(12)-2-12-164 - 158-2-12-144= 2 70 form is in short eum bl in long run, all fins earn only normal profit. c) te=2+ q + 9 2 AC - 2 + 1 + 5ą - žo + 4 -0892] od Cory eur = $3. ad + 1 + 1 = 3 It will increase the quantity demanded for consdetail Peresit will increase in shareun.