The gadget industry has four firms. All the firms have constant marginal cost, MC = 9...

The gadget industry has four firms. All the firms have constant marginal cost, MC = 9 and their fixed cost is zero. The market demand for gadgets is G = 400 − 40P, where G is the quantity of gadgets and P is the price of the gadgets.

a. If P = 8.5, how much would a firm would produce?

b. In a short-run equilibrium, it is possible to have an equilibrium price such that P > 9? Why or why not?

c. Assume that, in a short-run equilibrium, all the firms produce the same amount. What is the equilibrium price? What is the total supply? How much does an individual firm produce?

Solutions

Expert Solution

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a. If P = 8.5, how much would a firm would produce?

Since P is less than MC, each firm would produce zero output.

Each firm will require to atleast recover their variable costs in the short run.

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b. In a short-run equilibrium, it is possible to have an equilibrium price such that P > 9? Why or why not?

Yes, it is possible to have equilibrium price P > 9 in the short run.

This is an oligopoly type market, where economic profits are possible.

It is possible that a firm charges a price higher than MC, and earns profits.

Since there are just four firms, they may find themselves in a strategic situation, where they compete on price or quantity.

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c. Assume that, in a short-run equilibrium, all the firms produce the same amount. What is the equilibrium price? What is the total supply? How much does an individual firm produce?

If all firms produce the same amount, they may not be able to charge a price higher than MC.

If MC = 9,

G = 400 - 40 (9)

Total Supply G = 40 units

Equilibrium price = $9 per unit

Each firm produces (40/4 = ) 10 units

Rahul Sunny answered 1 year ago

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