Question

The wholesale market for Gala apples is perfectly competitive consisting of identical individual producers with cost function C = 200 + q2 where q is a firm’s number of crates of apples supplied. The current market price is P = $50 per crate q. Market demand for Gala apples is QD = 8,000 – 100P.

a. Find a typical firm’s supply function and the quantity a supplier produces at the $50 price.

b. Find the market quantity demanded at price $50.

c. Calculate the profit/loss for a supplier and show graphically the situation (for a firm and in the

market).

d. Explain how this market will adjust to a long-run equilibrium. Find/calculate the long-run

equilibrium market price, quantity, and a firm’s profits. (Assume market demand remains constant but that the number of (identical) firms can increase/decrease, i.e., firms can enter/exit the market.) Show the long-run equilibrium graphically for a firm and in the market.

e. At the long-run equilibrium, how many firms exist in the market and how much does each supply?

f. Show on producer surplus and consumer surplus on your market graph above. Using these concepts, explain why we say that the competitive market output maximizes the economic welfare of suppliers and demanders.

(10 points) A firm’s production function is q = 10KL with per unit input prices for labor w = 3 and

capital r = 2. Support your answers with a graph of isoquant-isocosts.

a. Calculatetheleast-costinputcombinationofLandKtoproduce60unitsofoutput.

b. Suppose the wage decreases to $2. How does this affect input use holding constant output at 60? c. What are the total costs of producing the two output levels in parts (a) and (b)?

Answer 1