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

Question

Suppose you are given the following information about a particular industry: QP -8500-200P Qs= 1500P Market demand Market supply Firm total cost function C(g) = 601 +- 400 MC (q) = Firm marginal cost function. 400 Assume that all firms are identical and that the market is characterized by perfect competition. Find the equilbrium price, the equilibrium quantity, the output supplied by the firm, and the profit of each firm. The equilibrium price is S 5. (Enter your response rounded to two decimal places The equilibrium market quantity is 7500 units. (Enter your response rounded to two decimal places.) The output supplied by one firm is 1000 units. (Enter your response rounded to two decimal places.) Finally, the profit of each firm is S 1899 . (Enter your response rounded to two decimal places.) 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? Firms should enter This will decrease market price and increase market quantity 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. The lowest price at which each firm would sell its output in the long run is S 2.45, at which point profit will be zero (Enter your response r A firm would not be willing to produce in the long run at prices below this level because the industry due to positive economic profit.

Explanation / Answer

Lowest price in the short run will be equal to the marginal cost, as the fixed cost wont change in the short run.

Marginal cost = 2 x 1000 / 400 = $5.

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