Question

Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves.

Furthermore, suppose that a representative firm’s total cost is given by the equation TC = 120 + q² + 2q where q is the quantity of output produced by the firm.

You also know that the market demand for this product is given by the equation P = 1200 – 2Q where Q is the market quantity. In addition you are told that the market supply curve is given by the equation P = 120 + Q.

a. What is the equilibrium quantity and price in this market given this information?

b. The firm’s MC equation based upon its TC equation is MC = 2q + 2. Given this information and your answer in part (a), what is the firm’s profit maximizing level of production, total revenue, total cost and profit at this market equilibrium?

Is this a short-run or long-run equilibrium? Explain your answer.

c. Given your answer in part (b), what do you anticipate will happen in this market in the long-run?

d. In this market, what is the long-run equilibrium price and what is the long-run equilibrium quantity for a representative firm to produce? Explain your answer.

e. Given the long-run equilibrium price you calculated in part (d), how many units of this good are produced in this market?

1. In the long-run will a representative firm in this industry earn negative economic profits, positive economic profits, or zero economic profits? (Hint: again, no calculation required).
2. What will be the new long-run equilibrium price in this industry?
3. At the new long-run equilibrium, what will be the output of each representative firm in the industry?

Answer 1