Question

A3

-

10. Imagine a firm with the short run cost structure: Total Cost ( TC)= 9 +q2Marginal Cost(M)= 2q.

(a)

Write out expressions for total fixed cost (

FC

), total variable cost (

VC

), average variable cost (

AVC

),

and average total cost (

ATC

). Be sure to show your work. [4]

(b)

At what quantity is

AVC

at its minimum (at what

AVC

level)? At what quantity

is

ATC

at its

minimum (at what

ATC

level)? [3]

(c)

Given your results above, sketch

MC

and

AVC

from

q

= 0 to

q

= 9. Calculate

ATC

for q = 1, 3, 6,

and 9. Use this information to add

ATC

to your diagram (from

q

= 1 to

q

= 9). [4]

(d)

Assuming that the firm is

a price

-

taker operating in a competitive market, derive an expression for

the firm’s supply curve, (ie. the profit maximizing output for the firm as a function of the market

price). What is the shut

-

down price for this firm (ie. at what price would this f

irm choose to produce

zero)? [3]

(e)

Suppose the competitive market is composed of firms (and potential firms) identical to the one

described above. Is it possible that a market price of $8 is a short run equilibrium price? Is it

possible that a market pric

e of $4 is a short run equilibrium price? Explain. [4]

(f)

Assuming that the minimum point of the short run

ATC

curve for all firms is also the minimum point

of the long run average cost curve (

LRAC

) is it possible that either of the prices identified in par

t (e)

is a long run equilibrium price? Explain. [4]

(g)

Under the assumptions of parts (e) and (f), what is the long run equilibrium price in this market? If,

at that price, the quantity demanded in the market is 882 units, what is long run equilibrium numb

er

of firms in this market? [4]

Answer 1