Question 1:
Consider a perfectly competitive market in good x consisting of 250 consumers with utility function:
u(x,y) = xy
Denote Px to be the price for good x and suppose Py=1. Each consumer has income equal to 10. There are 100 forms producing good x according to the cost function c(x)=x^2 + 1.
a) Derive the demand curve for good x for a consumer in the market
b) Derive the market demand curve for good x
C) Derive the individual firm’s supply curve for good x.
D) Derive the market supply curve for good x
e) Determine the equilibrium price and quantity in the market for good x.
F) is the market currently in long run equilibrium? Why or why not?
1) utility Maximizing condition:
MUx/px= MUy/py
Y/px=x/1
Y=px*x
Budget constraint,
M=py*y+px*x
M=1*(px*x)+px*x=2*px*x
X=M/(2*px)
M=10
X=5/px
2) Market demand is sum of individual demand
X=250*5/px=1250/px
3) individual firm supply function is nothing marginal cost function.
MC=2x
P=2x( inverse supply)
X=0.5p( supply function)
4) Market supply is sum of individual supply,
X=100*0.5p=50p
5) Equilibrium at market demand= market supply
1250/p=50p
P^2=25
P*=5
X*=50*5=250
The long run Equilibrium price is equal to Minimum average cost.
The average is Minimum at , where it is equal to marginal cost.
ATC=x+1/x
ATC= MC
X+1/x=2x
1/x=x
X^2=1
X=1
Min ATC=1+1/1=2
So price is not equal to Minimum average cost,so Equilibrium is not in long run.
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