The market for wheat consists of 500 identical firms, each with the total and ma
ID: 2496202 • Letter: T
Question
The market for wheat consists of 500 identical firms, each with the total and marginal cost functions shown:
TC = 90,000 + 0.00001Q2
MC = 0.00002Q,
where Q is measured in bushels per year. The market demand curve for wheat is Q = 90,000,000- 20,000,000P, where Q is again measured in bushels and P is the price per bushel.
a. Determine the short-run equilibrium price and quantity that would exist in the market.
b. Calculate the profit maximizing quantity for the individual firm. Calculate the firm's short-run profit (loss) at that quantity.
c. Assume that the short-run profit or loss is representative of the current long-run prospects in this market. You may further assume that there are no barriers to entry or exit in the market. Describe the expected long-run response to the conditions described in part b. (The TC function for the firm may be regarded as an economic cost function that captures all implicit and explicit costs.)
Explanation / Answer
a. Market supply is horizontal sum of individual firm supply (firm s MC curve).
Firm s TC = 90,000 + 0.00001Q2
MC = 0.00002Q = P.
Solve for Q in terms of P to express as supply curve
P = 0.00002Q
Q = 50,000P
Market supply curve is horizontal sum of firm supply curve or N-times the firm supply curve (N is the number of firms).
QS = 500(50,000)P
QS = 25,000,000P
Equate QS and QD to determine price and quantity
25,000,000P = 90,000,000 - 20,000,000P
45,000,000P = 90,000,000
P = $2.00
Q = 25,000,000P
Q = 25,000,000(2)
Q = 50,000,000
b. To determine the firm's output, equate price and marginal cost
P = 2 = 0.00002Q
Q = 100,000
Firm's Profit( ) = TR - TC
TR = 2.00(100,000)
TR = 200,000
TC = 90,000 + 0.00001Q2
TC = 90,000 + 0.00001(100,000)2
TC = 190,000
= 200,000,000 - 190,000 = 10,000
c. Firms are earning economic profit. so we would expect entry to occur, causing the market supply curve to shift rightward. As the market supply curve shifts rightward, price falls, which in turn causes each firm to reduce its output. This will continue until we reach long-run equilibrium at zero profit.
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