Question

Suppose in Pakistan, all the firms are identical with identical cost curves which mean
industry is perfectly competitive. Now please consider this following information about the
industry: A representative firm’s total cost is given by the equation TC = 100 + q2 + q where
q is the quantity of output produced by the firm. You also know that the market demand for
this product is given by the equation P = 1000 – 2Q where Q is the market quantity. In
addition you are told that the market supply curve is given by the equation P = 100 + Q.
a. What is the equilibrium quantity and price in this market given this information?
b. The firm’s MC equation based upon its TC equation is MC = 2q + 1. Given this information
and your answer in part (a), what is the firm’s profit maximizing level of production, total
revenue, total cost and profit at this market equilibrium? Is this a short-run or long-run
equilibrium? Explain your answer.
c. Given your answer in part (b), what do you anticipate will happen in this market in the
long-run?
d. In this market, what is the long-run equilibrium price (breakeven or MC=ATC) and what
is the long-run equilibrium quantity for a representative firm to produce? Explain your
answer?
e. Given the long-run equilibrium price you calculated in part (d), how many units of this
good are produced in this market?

Answer 1