problemset1 - 2 At what level of output is average cost at...

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E460 PROBLEM SET 1 In answering the following questions, do not restrict yourself to finding answers that are natural numbers. Instead, provide decimal answers where you compute them to be so, even though it may lack some intuition. 1. A firm with a U-shaped average cost curve finds that its revenues exceed its costs when it sets price equal to marginal cost. On which part of its average cost curve is the firm operating? 2. A bakery has fixed costs of $10 per day and variable costs of $1 per loaf. Its oven can handle up to 50 loaves a day and it is impossible to obtain additional capacity. Sketch the bakery’s average cost curve, average variable cost curve, average fixed cost curve and marginal cost curve, all on the same graph. 3. Consider the following total cost function for an individual firm: C(q) = 10 + q +1/4×q
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Unformatted text preview: 2 At what level of output is average cost at its lowest? Also draw a graph showing firm average cost and marginal cost curves. 4. Consider a short-run perfectly competitive equilibrium with 2 identical firms, each with the above cost function. What is the equation for the industry supply curve? 5. The industry demand curve is estimated to be Q = 100 p If there are two firms operating in the market, what is the equation for the residual demand curve for each firm? 6. Solve for the short-run perfectly competitive equilibrium levels of price and output in which there are two firms. 7. What are profits of each firm in this short-run equilibrium? 8. How many firms will compete in the long-run perfectly equilibrium (remember, don't worry if the answer is not a natural number, fractions of firms are ok for our purposes)?...
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This note was uploaded on 09/11/2008 for the course ECON 418 taught by Professor Breman during the Spring '08 term at University of Arizona- Tucson.

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