Question

In: Economics

Consider a competitive market for desk lamps. The demand in this market is D(P)=160-10P. There are...

Consider a competitive market for desk lamps. The demand in this market is D(P)=160-10P.

There are five firms in this market currently, each with cost function C(q)=q2/6 +24. Each firm acts competitively.

(i) What is the short-run market supply?
(ii) What is the short-run equilibrium in this market in terms of total quantity and price?

How much profit does each firm make? What is the consumer surplus?

(iii) Now suppose that free trade with the rest of the world has been allowed. The number of domestic firms is still 5. In the world market, the same desk lamps are available at price $3. What is the total quantity that consumers purchase, the quantity supplied by each domestic firm in the short-run and amount of imports? What is the consumer surplus under free trade?

(iv) Now, suppose again that there is no trade with the rest of the world.
Suppose that this is a ``constant cost’’ industry. What it the long-run equilibrium price in this market? How many firms will be in the market in the long-run equilibrium and how much will each supply?

Solutions

Expert Solution

Consider a competitive market for desk lamps. The demand in this market is D(P)=160 - 10P.

There are five firms in this market currently, each with cost function C(q) = q2/6 +24. Each firm acts competitively.

(i) What is the short-run market supply?

MC = 2q/6 = q/3

q = 3MC or q = 3P. Market supply Qs = nq = 5*3P = 15P.
(ii) What is the short-run equilibrium in this market in terms of total quantity and price?

Qs = Qd

15P = 160 - 10P

P = 160/25 = 6.4 and market quantity = 15*6.4 = 96

How much profit does each firm make? What is the consumer surplus?

Each firm produces 96/5 = 19.2 units and profits are TR - TC = 19.2*6.4 - (19.2^2)/6 -24 = 37.44

Q = 160 - 10*3 = 130 units

the quantity supplied by each domestic firm in the short-run is q = 3P = 3*3 = 9 units

and amount of imports = 130 - 9*5 = 85 units.

What is the consumer surplus under free trade?

CS = 0.5*(16 - 3)*130 = 845

(iv) Now, suppose again that there is no trade with the rest of the world. Suppose that this is a ``constant cost’’ industry. What it the long-run equilibrium price in this market

The price is = AC = MC

(q2/6 +24)/q = q/3

q/6 + 24/q = q/3

24/q = q/6

q = 12 units

Long run price P = 12/3 = $4.

How many firms will be in the market in the long-run equilibrium

Market quantity in long run Q = 160 - 10*4 = 120 units

each firm will supply 12 units so there will be 10 firms in the long run to produce a total of 120 units.

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Q1. Peter is producing table lamps in the perfectly competitive market desk lamp market. a) Suppose...

Q1. Peter is producing table lamps in the perfectly competitive market desk lamp market. a) Suppose the equilibrium price in the desk lamp market is $50. How many table lamps should Peter produce, and how much profit will he make? Please make use of TR, TC, MR and MC curves to illustrate. b) In next week, the demand for desk lamps drops and the price drops to $30, should Peter shut down? Explain. Output Total cost AFC AVC ATC MC...

Assume a competitive market with the following demand and supply curve, D(p) =a-b*P and S(p)= c...

Assume a competitive market with the following demand and supply curve, D(p) =a-b*P and S(p)= c + d*. Assume the government imposes a tax of t on each unit sold. The equilibrium prices without (P) and with the tax (net price Pn and gross price Pg ) are

Consider a competitive market with demand and supply curves given by Qd(p) = 100 - P...

Consider a competitive market with demand and supply curves given by Qd(p) = 100 - P & Qs(P) = P If the government wanted to charge a constant per unit tax of T per unit, what is the maximum amount of tax revenue the government can generate?

Consider a competitive market characterized by the following supply and demand formulas: Demand: P = 105...

Consider a competitive market characterized by the following supply and demand formulas: Demand: P = 105 - 0.25QD Supply: P = 0.275QS (c) With the aid of a diagram, carefully explain what would happen in this market if the government were to impose a price ceiling of $30 per unit in this market. As part of your answer calculate the size of the deadweight loss associated with this price control.

1. Consider a Perfectly Competitive market where the demand is given by P = 6000 –...

1. Consider a Perfectly Competitive market where the demand is given by P = 6000 – 4Q and the supply is given by P = Q. a. Calculate the equilibrium price, quantity, total Consumer Surplus, and total Producer Surplus. Show all calculations. b. Suppose this market now is controlled by a single-price monopolist whose marginal cost function is MC = Q. Determine this firm’s marginal revenue function, then calculate its profit-maximizing quantity, price, the total Consumer Surplus, and the total...

Consider three Perfectly Competitive market scenarios. The market demand curve is given by P = 100...

Consider three Perfectly Competitive market scenarios. The market demand curve is given by P = 100 – Q where P is the market price and Q is the market quantity. In the first scenario, the market supply function is P = $50. In the second, the market supply function is P = Q, and in the third, the market supply function is Q = 50. For each scenario, draw the appropriate graph; then calculate the equilibrium price and quantity, the...

(Dominant Firm) Consider a market in the short-run. The market demand curve is given by D(p)...

(Dominant Firm) Consider a market in the short-run. The market demand curve is given by D(p) = 2000 − 30p. There is a dominant firm in the market with cost function C(q) = 20q. There are also 10 price-taking fringe firms, each with cost function C(q) = 20q + q2 . Their marginal costs are therefore M C(q) = 20 + q. A) Find the supply function for an individual fringe firm, q(p). (You do not need to define this...

Consider a perfectly competitive market where the market demand curve is p(q) = 1000-q. Suppose there...

Consider a perfectly competitive market where the market demand curve is p(q) = 1000-q. Suppose there are 100 firms in the market each with a cost function c(q) = q2 + 1. (a) Determine the short-run equilibrium. (b) Is each firm making a positive profit? (c) Explain what will happen in the transition into the long-run equilibrium. (d) Determine the long-run equilibrium.

In a competitive market, the demand and supply curves are Q(p) = 18 - p and...

In a competitive market, the demand and supply curves are Q(p) = 18 - p and S(p) = 2p respectively. What is the price level in the competitive equilibrium?

Market in competitive equilibrium, the demand is the demand andsupply respectively are p = 100...

Market in competitive equilibrium, the demand is the demand and supply respectively are p = 100 - QD and p = 20 + (QS /3). The government introduces a subsidy of s = $4 per unit of the good sold and bought Suppose the government is trying to determine the amount of subsidy (they think they can do better than s=$4), to maximize the equilibrium quantity transacted (bought and sold) in the market, yet it has a budget of $1500...

Subjects