Question

1. Assume that all firms are identical and operate in a market that is characterized by perfect competition. The market demand is given by Q D = 3000 − 5 P , the market supply is given by Q S = 550 P, the firm’s total cost function is given by C ( q ) = 500 + q 2 100.

a. (5) Find the market equilibrium quantity, the market equilibrium price, the output supplied by a single firm, the profit of each firm, and the number of firms in the industry.
b. (5) Will there be entry into or exit from the industry in the long run? Explain. How will the market equilibrium be affected by entry and exit?
c. (5) What is the lowest price at which each firm would sell its output in the long run? Is profit positive, negative, or zero at this price? Explain.
d. (5) Suppose that all of the firm’s fixed costs are sunk, what is the lowest price at which each firm would sell its output in the short run? Is profit positive, negative, or zero at this price? Explain.
e. (5) Suppose that a tax of $1 is assessed for every unit of output and is imposed on only one firm in the industry. Find the new profit maximizing output for the firm. Now suppose that the tax of $1 is imposed on every firm in the industry. Find the new profit maximizing output for the firm. Is the effect of the tax on the firm’s output larger when the tax is imposed only on one firm or when the tax is imposed on every firm? Explain.

Answer 1