Just have to Answer 1 (your welcome to answer all three however) Intermediate Mi
ID: 1195450 • Letter: J
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Just have to Answer 1 (your welcome to answer all three however)
Intermediate Microeconomics Econ 401-0 Fall 2015 Homework 3 Answer all the questions Homework l is due December 7. I will deduct 20% of your grade i your homework is late by less than 24 hours. I will not accept homework that is more than one 24 hours late. Do not email your homework Submit it to the appropriate drop box folder or bring it to the class. 1. In the widget industry, a constant-cost competitive industry each firm has fixed costs of S10 and faces the same marginal cost curve that is given in the first table below. The industry wide demand curve is given in the second table below. Quantity Marginal Cost S 4 13 Table I Price (S) uantitY (W 60 48 36 24 12 13 Table2 Assume that the industry is in long-run equilibrium. a. b. c. What is the price of a widget? What quantity is produced by each firm? How many firms are in the industry?Explanation / Answer
a)
2(MC = TVC1 - TVC0 , 2 = TVC1 - 0)TVC1= 2
Hence the long run equilibrium position for a firm is the level of output where AC = MC that is where AC is minimum.Hence long run output for each firm would be 4 units of output since there AC = MC = 7.
a)Now in case of a long run equilibrium P = MC.Long run equilibrium price would be 7.
b) total output demanded at this price is 24 units.Each firm produces 4 units.
c) However as each firm produces only 4 units hence the number of firms in the industry is 24/4 = 6 firms.
d)In the short run before entry or exit of firms when industry's demand curve shifts rightwards the existing firms start incurring super normal profits, however they no longer produce at the minimum point of AC curve.Thus the existing 6 firms are producing 6 units of output each such that total output in the industry is = 36 units(6 * 6).However now the equilibrium price in the market is 13.
After the rise in demand the market price would surely rise to either 11 or 13.It cant rise to 11 because if it does so then each firm must produce 5 units according to their cost conditions given the condition of short run equilibrium given by P = MC.If each firm produces 5 units then market output turns out to be only 5 * 6 = 30 units whereas market output at price 11 is 48.
However when price = MC = 13 each firm produces 6 units .With 6 firms in the market industry output is 6 * 6 = 36 which is also the industry output demanded at price = 13.
e) However in the long run each firm again returns to its original position since AC is same in the long run in the constant cost industry.Thus production by each firm would be the same as before = 4 units.Price would again return to the same level of 7.However since industry output at price = 7 is 60 , this clearly implies that number of firms = 60/4 = 15.Hence a total of 9 (15 - 6) firms have entered the industry due to the super normal profits earned by it.
Quantity MC TVC TC AC 1 22(MC = TVC1 - TVC0 , 2 = TVC1 - 0)TVC1= 2
2 +TFC =12 12/1 =12 2 4 2+ 4 = 6 6 + 10 = 16 16/2 =8 3 5 6 + 5 = 11 11 + 10 = 21 21/3=7 4 7 11 + 7 = 18 18 + 10 = 28 28/4=7 5 11 18 + 11 = 29 29 + 10 = 39 39/5=7.8 6 13 29 + 13 = 42 42 + 10 = 52 52/6=8.66Related Questions
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