Question

Market demand is given as QD = 50 – 2P. Market supply is given as QS = 3P + 10. Each identical firm has MC = 2.5Q and ATC = 2Q.  

a. What quantity of output will a single firm produce? What is the price?

b. Calculate each firm’s profit? What will happen to it in the long-run? Explain the process.

c. Draw the individual demand, MR, supply and ATC curves. Show profit in the diagram

Answer 1

QD = 50 - 2P ......... (1)

QS = 3P + 10 ..........(2)

MC = 2.5Q .........(3)

ATC = 2Q ..........(4)

a. price is Quantity of demand is equal to Quantity of supply

QD = QS

50 - 2P = 3P + 10

50 - 10 = 3P + 2P

40 = 5 P

so, P = 8

price is 8

put value of P which is price in equation 1 or 2

QD = 50 - 2 P

QD = 50 - 2(8)

= 50 - 16

= 34

quantity of output is 34

b. Firm profit

marginal cost is qual to average total cost

price is equal to average total cost

marginal cost = 2.5 Q

Average total cost = 2 Q

let consider the Q is q

8 = 2q

q = 4

Average total cost is = 2 q

= 2 * 4

= 8

number of firm profit is  = Q/q

= 34/ 8

= 4.25

in long run

price is equal to Average total cost then the firm is in long run equilibrium.

if demand for thes product goes down then it quantity decreasing as well as price . that means thes firm reduce the price whatever they selling. For maximazing the profit they have to reduce output .

c. graph supply and demand curve

marginal revenu and average total cost