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An industry producing chemicals shows the following marginal cost function: MgCp = 5+2X Where X is...

An industry producing chemicals shows the following marginal cost function: MgCp = 5+2X

Where X is the quantity produced. The demand for X is represented by the following function: P = 20 – 2X.

Assume that the market is perfectly competitive and unregulated.

A) Compute the equilibrium price and equilibrium quantity, graph.

Solutions

Expert Solution

A perfectly competitive market will produce at the point where price is equal to marginal cost. So, in equilibrium,

Price = MARGINAL COST

20 - 2X = 5 + 2X

20 - 5 = 2X + 2X

4X = 15

X = 15/4 = 3.75 is the answer.

Price = 20 - 2X

= 20 - 2(3.75)

= 20 - 7.5 = 12.5 is the answer.

In a perfectly competitive market, the price remains constant which is shown by a horizontal line in the graph below and in this case the marginal cost is increasing which is shown by the upward sloping marginal cost curve.

Rahul Sunny answered 1 year ago
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