Question

Please answer G and H fully! Both graphically and explain in words!

1) Imagine that you work for a firm that sells good x in a perfectly competitively market You know that you are one of 100 firms in this market and that they all have the same short run individual supply function q 2 P-0.5 P1 +0.5 K You also know that there is only one type of consumer, that there are 100,000 of them in the market, and that they have individual demand functions x 10-0.1 P 0.5 I+ 0.02 P What is the Market Demand function? a. b. What is the (short run) Market Supply function? What is the Equilibrium Market Price? c. *(Assume that PL=20, K 2, Py 4, and I = 200) d. What is the market equilibrium quantity? e. What quantity should your firm produce and sell in the short run? f. At this short run equilibrium, what is the profit/loss the firm is making? *(Assume that L= 10 and P 20) What happens in the short run to market demand, firm demand, equilibrium price g. firm quantity supplied, and profit if income increases from 200 to 300? h. What will happen in the long run in this market after the increase in income? *(Show graphically and explain in words)

Answer 1

G) SHORT RUN In short run, when consumer's income increases from 200 to 300. consumer will have more disposable income and demand more. As a result, Market Demand increases. (From D to D') With increase in demand, consumers will be willing to pay more to obtain the goods. As a result, price wncreases from a topi. With vise in price , market supply will uncrease in order to earn more forebits. Thus Equilibrium price will increase . (s to S!) (Eto-E') Price H) LONG RUN x Quantity An long run, encess profits made by established firms will attract new forms into the industry. The unflen of firms wirl shift the market supply to right and will cause price to fall → The new equilibrium price may remain above the original equilibrium price or it may return to original level, depending upon the shift in the market supply.