Question

4. The supply and demand in a given industry is defined by QD – 6500 – 100P and QS – 1200P respectively. In this industry, the cost function of an efficient firm is C(q) = 722 + 2/200. You can assume that all firms in the industry are efficient and identical) and the industry is operating under perfect competition. (a) Find the market equilibrium (prices and quantities) (b) Determine how much will each firm produce, and the profits for each firm (c) How many firms are there in the market, and do you expect to see entry/exit in the long run? What will happen to the market equilibrium if there is entry/exit (d) In the long run, what is the minimum price at which a firm is willing to produce? Are profits positive, negative, or zero at this price? (e) In the short run, what is the minimum price at which a firm is willing to produce? Are profits positive, negative, or zero at this price?

Answer 1

a Demand: Q = 6500 - loop and supply: os= 1200P Cost function clq2 = 722 +9720 Market equilibinom: Demanda supply 6500-loop= 12000 - 6500= 1300p . equilibinium price pa = $13 Q = 1200 P = 1200 (13) = 15600 equilibri en [a - 156oo units] on perfect Competition. Poice = marginal cost Pamic - 3 - 1 fo; 3= g [1300 ag ] firm's quantity in - Lifer) Profit = pg - (1 22 + g ²1 3 13113.-) - [ 722 + (130037 = 16400 - [ 722 +8450] [Profit = $7728 zool. 100. [72 BES Scanned with CamScanner

number y firma (m) - 15.600 g. 1300 (n = 12] So, there are 12 firms in the market Since the profit is positive more from, will enter the market till the profit becomes o. X 200 1 In Long roni. p = m(= A.C. son Price = marginal - Arenge cost Aika - 1227 . -. 722 foj me =AC 4 / 5 = 12 + 2000 9 - 12/20 = 123 q = 722 -722 (200) [= 380] So, price : pame= 97 - 380 = 3.8 minimum price = $3.8 The profit in treat price will be zero. C scanned with-CamScanner