Question

Consider a perfectly competitive industry in which each firm i has a total cost function given by the equation: TC= 128 + 4q+2q^2. Further assume that the industry demand function is given by the following: P = 84 – 2Q.

a) Describe the long run market equilibrium. That is, identify the equilibrium price and quantity, output for each firm, the number of firms in the industry and the level of producer and consumer surplus. What is the value of own price elasticity of demand at the market equilibrium? Is demand elastic or inelastic?

Show the outcome for individual firms in a well labelled diagram. Also, show the market equilibrium in a separate well labelled diagram

b) Assume now that the government imposes a specific tax of 8 on sellers. Find the new market equilibrium. That is, identify the equilibrium price and quantity, output for each firm, the number of firms in the industry and the deadweight loss associated with the tax.

Show the outcome for individual firms in a well labelled diagram. Also, show the market equilibrium in a separate well labelled diagram [4 marks]

c) What does this long run supply curve look like and why?

Answer 1

Pe84-20 123 + 49+29 2 TC AC-128 36 /2 AC 96 Lauas cmucofAC 2 4t23)36 47-8 16+ Pudcotry aulfput eren 8 atz 87-17-67e 24 24 Paylees 24x 48- ST Censumer se ller lpesed 36+8-44 Kas 94-4Y A L Pgeclanc fris MC= DWLT bnth Zx4 16 lerfetly slaste t mind AC