Question

Suppose you are given the following information about a particular industry:

Qd= 6500-100p MARKET DEMAND

Qs= 1200p MARKET SUPPLY

C(q)= 722+Q2/200 (q square) FIRM TOTAL COST FUNCTION

MC(q)=2Q/200 FIRM MARGINAL COST FUNCTION

Assume that all firms are identical, and that the market is characterized by perfect competition.

a.   (10) Find the equilibrium price, the equilibrium quantity, the output supplied by the firm, the profit of each firm, and the number of firms in the industry.

b.   (10) Would you expect to see entry into or exit from the industry in the long run? Explain. What effect will entry or exit have on market equilibrium?

c.   (10) 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.   (10) 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.

f. (5) 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

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