The market for books is perfectly competitive and a constant cost industry. The
ID: 1217949 • Letter: T
Question
The market for books is perfectly competitive and a constant cost industry. The short run industry supply curve is given by the equation P=10+Q, while the industry demand curve is given by the equation P=150-Q, where P is the market price and Q is the market quantity. The representative firm's MC vure can be written as MC=2q, and its TC id given by the equation TC=50+q2 thus (q2) is q square., Where q is the quantity produced by the firm.
a. What is the equilibrium price and the equilibrium market quantity for this good in the short run?
b. What is the profit maximizing quantity for a representative firm to produce in the short run?
Explanation / Answer
a. The condition for equilibrium is Demand = Supply
=> 150 - Q = 10 + Q
=> 2Q = 140
=> Q = 140/2 = 70
and, P = 150 - 70 = $80
b. The firm profit maximizes by producing that level of output where MR = MC.
Since the equilibrium market price is the firm’s marginal revenue you know that
MR = $80.
=> 2q = 80
=> q = 80/2 = 40
Thus, the profit maximizing level of output for the firm is 40 units when the price is $80 per unit.
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