Question

Consider a competitive market in which the market demand for the product is expressed as: P = 164 - 0.0002Q, and the supply of the product is expressed as: P = 4 + 0.0003Q. The typical firm in this market has a marginal cost of MC = 4 + 1.2q.

a. Determine the equilibrium market price and output. Calculate the consumer surplus and the producer surplus at equilibrium in the industry. (2+2+2 = 6 points)

b. Determine the output of the typical firm, given your answer to part (a) above. How many firms are there in the industry? (2+2 = 4 points)

c. If the market demand were to increase to P = 172 - 0.0002Q, what would the new price and output in the market be in the short-run? What would the new output for the typical firm be? (Do not round up your answer.) (2+2 = 4 points)

d. If the original supply and demand represented a long-run equilibrium condition in the market (assuming constant cost industry), would the new equilibrium (c) represent a new long-run equilibrium for the typical firm? Explain. (2+2 = 4 points)

e. To be in the long-run equilibrium with the new demand, how many firms would enter into or leave from the industry? Show your work.  (2+8 = 10 points)

Answer 1