Suppose there are n = 100 firms in the market each with the cost function is...

Suppose there are n = 100 firms in the market each with the cost function is C(y) = 5 + y + 0.5y^2. What is the inverse market supply curve? What is the market supply curve? Draw the market supply curve. (Hint: Go from individual supply to market supply. Finish by getting inverse market supply.)

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Expert Solution

There are 100 firms, and each of them possess the cost function . The supply function of the firm will be the marginal cost of the firm, above the average variable cost. The MC can be found as or . The average variable cost will be or or . As can be seen, for all y>0, MC>AC. Hence, the MC is the supply curve of the individual firm.

The supply curve will be depicted as , for p being the price, and the equality indicates that the production takes place where the market price is equal to the marginal cost, in case of perfect competition. Hence, inverse supply curve of 1 firm is , and the supply curve will be . The supply curve of 100 firms willl be hence , ie or is the market supply. The inverse market supply will be .

Rahul Sunny answered 1 year ago

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