Question

(20 marks) Suppose the market for disposable gloves is competitive and it is originally operating at the long run equilibrium. An important raw material of producing disposable gloves is natural rubber. Suppose there is a drastic increase in the price of natural rubber. With the aid of side-by-side diagrams, explain the impacts of the above change on the equilibrium price and equilibrium quantity in the market for disposable gloves, as well as the profit maximizing output level of a typical producer of disposable gloves in the short run. (For the sake of simplicity, do NOT draw the AC curve in your answers.) (12 marks) Would the above change in cost in (a) lead to a profit or a loss to a typical producer? What will happen to the market price in the long run? Explain briefly in your words. (4 marks) Explain TWO reasons why we might take the market for disposable gloves as a competitive market. (4 marks) 8. (8 marks) Suppose the total cost function of a firm is: C = 3q? - 12q² + 204 Find the marginal cost function. Show your steps. (2 marks) b. Find the average total cost function. Show your steps. (2 marks) Find the output level that correspond to the efficient scale of the firm. Show your steps. (2 marks) Show your results in (c) in a diagram. (2 marks)

Answer 1

7) a)

{- / PEAR's me! D= ARMR 2 12 Industry level Individual level of from Impact quantity At the industry level, equilibrium price rises and ear falls. At the firm kvel, due to the rise in market price, the produced at the individual level rises. The total increases as well. quantity revenue CSbanned with CamScanner

The equilibrium market price rises and the equilibrium quantity falls. At the firm's level, in the short run, quantity sold increases, which results in higher revenues than before.

b) The above change in cost might lead to a profit for the individual firm since the price of the gloves have also risen with a rise in price of natural rubber.

However in the long run, market price may fall back to the initial equilibrium level, since people might adjust their preferences in the long run. Due to high price of gloves, people might shift to alternatives or might chose not to buy them, as a result, the demand curve shifts backwards. This results in a fall in the equilibrium price (back to P* ) as well as a fall in the market quantity.

c) One reason is the lack of product differentiation. Disposable gloves can not be produced in wide varieties by different firms, only the quality might differ which might not be very easy to identify. Hence they can not charge hugely varying prices and stay in the same market.

Another reason could be the existence of a large number of small firms in the gloves market, since they can be cheaply manufactured with relatively low skill set. Disposable gloves market is indeed large since the demand for them by hospitals is immense. So, it is not possible for just one firm to satisfy the demand. The existence of many indistinguishable firms makes the market a price taker.