Question

A. A competitive firm has a short run total cost curve represented by the following equation:C(q) = q2/4 + 50

a. (4) Derive how many units a profit maximizing competitive firm produce as a function of P(price)(qs(p)=).

b. (2) If there are 100 firms in the market, derive the supply curve.

c. (6) The market demand is 1200 –100P derive the market price and the firm’s profit.

d.(2)Given your answer in c, explain what will start to happen in the long run.

B. Graph a competitive firm that would operate in the short run, but exit in the long run. Show its optimal output, revenue and COSTSsuch that it would operate in the short run but not the long run. Include all curves needed for this..

Answer 1

Part (A)

short run supply curve is the marginal cost curve

short run supply curve for a firm

Part (B)

Part (C)

market output is 800 units and equilibrium price is $4

each firm produces 8 units

each firm incurs a loss of $34 in short run

Part (D)

firms will react to losses in the long run through a process of exit, in which existing firms reduce output or cease production altogether.

Exit of many firms causes the market supply curve to shift to the left. As the supply curve shifts to the left, the market price starts rising, and economic losses start to be lower. This process ends whenever the market price rises to the zero-profit level, where the existing firms are no longer losing money and are at zero profits again.