Question

B2-(13 MARKS) Consider a perfectly competitive industry in which each firm i has a total cost function given by the equation: TC,- 128+ 4q+ 2q. Further, assume that the industry demand finction is given by the following: P = 84-20 a) Describe the long nun market equilibrium. That is, identify the equilibrium price and quantity output for each firm, the number of fims 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 denmand 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 [5 marks] b), Assume now that the government imposes a specific tax of S on sellers. Find the new market equilibrium. That is, identify the equilibrium price and quantity, output for each firm, the mumber 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) In case study 5.7. (The ups and downs of supply in Australia's iron ore industry) there was a discussion about the supply curve there was a discussion about the supply curve for iron ore in Australia. What does this long run supply curve look like and why? [4 marks].

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Answer 1

For answer to part c) please post the case study mentioned.

Indusry P- 84-22 dlemand 23+ 49 +212 TO To Lat Cost ' sev dism sell at Run anrape Aun eaili b Rium the mimmum long price enal to Coct a) In P- nin LRAL ce 1t kod Al)) ACi ALi 128 4P+ 2.9 Y uuill aat dAlio To fend minimum SP e dAu 128 あ2二0. dli 2 t Phoduce 9i Bunits 26 Each frm Phice (P) uuill 128 4+213) be denand indus Py At P- $36 Q C84-36/2 244 unito Nuber 2418 3 Paoduen surpino Canoluma Suplno +C84-34x24 because paieu A 9453

Elastity LE) d& 36 54 I3 inelootic te) - 34 4 dlemand i s 1 So 1D s Cost 2m AL P- 36 y t PAie P- 36 Demne 42 24 Now; b 2 TeL=128+ .DA Ti -128+ TC 281 12 22- 28 12t 29 Nou AC dAC de -128 2 0 8nits Cla

Paice tP): 128 12 +208) 3 $44 P= 16+12t 16 Dow Pae i be $44 Each firm i prodne 1):Bunt Indus Hy demand 4-442 20mnits Number ms Cn) i 2-5 f Dead ueiat loss- C24-2037 8 DWL 2 DwL 91F Dwi 49 24 -36 Daman 42 &