Problem 4 The first figure in the diagram below shows market demand and supply c

Question

Problem 4 The first figure in the diagram below shows market demand and supply curves for a good. The second figure shows the short-run costs for an individual perfect competitor. Answer the following questions. Market Individual Firm Cost Price Curve 1 Curve 3 Demand Supply $15 $15 S10 $8 Curve 2 S4 40,000 Quantity 10 20 30 40 50Q 1) What is the equilibrium market price? 2) What does Curve 1 represent? 3) What does Curve 2 represent? 4) What does Curve 3 represent? 5) What is the profit maximizing level of output for the individual firm? Briefly explain why 6) Calculate total revenue (TR) at the profit maximizing level of output. Show your 7) Calculate total cost (TC) at the profit maximizing level of output. Show your work. 8) Calculate the short-run profit at the profit maximizing level of output. Show your 9) What would happen to the market in the long run? (Hint: In a perfectly competitive 10) Suppose that market demand substantially decreases so that market price is $3 now. work. work market, firms can enter or exit the market freely.) At this level of price, how much will this firm produce? Explain your answer.

Explanation / Answer

1) $15

2) Average Total Cost curve

3) Average variable cost curve

4) Marginal Cost curve

5) Ans: 40

Explanation:

Because at 40 units of output, the profit maximizing condition, i.e., P = MC is satisfied.

6) TR = P * Q

= $15 * 40 = $600

7) TC = $10 * 40 = $400

8) Profit = TR - TC

= 600 - 400 = $200

9) Since, the firms are earning positive economic profit, new firms will enter into the industry in the long run.

10) At, the price of $3, the firm will shut down, because price is less than the average variable cost.

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