Question

The Toy business has 4 firms. All firms have an identical marginal cost of MC = 9 and a fixed cost of 0. The market demand for Toys is T=200-20P were T is quantity and P is price of Toys.

1. If P=8.5 how much could a firm produce

2. In a short run equili. could the equili. price be P>9?

3. In a SR equili. all firms produce the same amount of toys. What is the equili price, total supply, and how much will an individual firm produce?

Answer 1

(1) A firm does not produce if the price is less than MC

The MC is 9 and Price is 8.5

The price is less than MC, it means firm produce nothing at this price. (or firm produce 0 unit at this price)

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(2)

For a perfectly competitive firm, short run equilibrium occurs at P=MC.

The short runt equilibrium price can't be greater than MC.

MC is 9

So, short run equilibrium price could not be greater than 9 (i.e. P>9)

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(3) Short run equilibrium condition; P = MC

=> P = MC

=> P = 9

Short run equilibrium price is 9.

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The market demand for Toys is T=200-20P

were T is quantity and P is price of Toys.

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T = 200 -20P

Put P = 9

=> T = 200 - 20(9)

=> T = 200 -180

=> T = 20

Total supply is 20 units.

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There are 4 identiticals firms in market,

Each firm output = (Total market output / Number of firms)

=> Each firm output = (20 / 4)

=> Each firm output = 5

An individual firm will produce 5 units of output.