HW 1 - Sol 1 - ECON 425 100 HOMEWORK 1 SOLUTIONS(PART I...

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E CON 425- 100 H OMEWORK 1 S OLUTIONS (P ART I) Figure 1 1) Figure 1 shows the cost curves for a typical firm in a competitive market. If there are 100 identical firms, what will be the market quantity supplied when p = 4, 8, and 10. What can you say about each firm’s profits for these prices? Answer: Competitive firms will supply where p = MC (Marginal Cost) as long as price is above Average Variable Cost (AVC). Therefore, firms will not supply for p = 4. Each firm will supply 50 and 60 units respectively for p = 8 and 10. Therefore, market supply (of the 100 firms) for p = 4, 8 and 10 correspond to Q = 0, 5000 and 6000. If price is below Average Cost (AC) firms make negative profits. Therefore, of the 3 prices, firms only make a profit when p = 10. When p = 4, firms are not supplying and thus just have to bear their fixed costs. 2) Suppose a monopolist has TC = 100 + 10Q + 2Q 2 , and the demand curve it faces is p = 90 2Q. What will be the price, quantity, and profit for this firm? What is the demand elasticity at this price and quantity?
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