Question

1. The monthly demand curve for Leather Jackets is: QD = 7,500 – 5P QD = demand for Leather Jackets per month P = price of Leather Jackets per month One firms supply curve is: qS = 5 + 0.25P (all firms have the same supply function)

1a. What is the price of Leather Jackets per month if the total supply from all firms is 7,000 Leather Jackets per month?

1b. How many Leather Jackets will each firm supply and how many firms are there?

1c. If all the firms were forced to close down due to Covid-19 what would the price be when firms are allowed to open and produce again. Explain your answer.

1d. If 10 firms exit the market, calculate the new market equilibrium price and quantity.

1e. If there is a change in demand so that demand drops by 50, calculate the market equilibrium quantity and price after the firms exit the market.

Answer 1

a. At equilibrium, QD = QS = Total Supply

So 7000 = 7500 - 5P

or 5P = 500

or P = 100

So the price of leather jackets is $100

b. Since there are many firms, so the firms are price takers. So the firms will all supply at the price of $100.

Putting this value in the supply curve we get: qS = 5 + 0.25 * 100 = 30

So Each firm will supply 30 jackets.

Number of firms in the industry = 7000/30 = 233.33 firms

c. If all firms are closed and then reopen, there would still exist the same number of firms and same competitive scenario. Assuming that the demand will remain the same, there will be no change in equilibrium pricing and quantity demanded or supplied by each firm.

d. If 10 firms exit the market, number of firms = 223.33

Total Supply = QS = 223.33 * qS = 223.33 * (5 + 0.25P) = 1116.65 + 55.83P

The demand curve remains the same.

So 7,500 – 5P = 1116.65 + 55.83P

or 60.83P = 6383.35

or P = 104.94 ~105

QD = 7500 - 5 * 105 = 6795

So the equilibrium quantity will go down to 6795 and the equilibrium price will be $105

e. If demand drops by 50, QD = 7,500 – 5P - 50 = 7450 - 5P

So at equilibrium, after firms have left the market,

7450 - 5P = 1116.65 + 55.83P

or 60.83P = 6333.35

or P = 104.11 ~104

Q = 7450 - 5 * 104 = 6930

So the equilibrium quantity will be 6930 and the price will be $104.

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