# handout 2 answers - How much profit will each firm earn in...

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Class Handout (October 28) 100B, Prof. Jacobsen Suppose short run total costs for a single firm at a particular capital level are given by: C short run = 8 + 4 q + 2 q 2 Make the simplifying assumption that the capital level implied above is such that min( SRAC ) = min( LRAC ) Suppose the market demand curve is given by: Q demand = 112 ! P a. Find the average cost minimizing quantity per firm. AC = 8 / q + 4 + 2 q min( AC ) = 12 occurs at q = 2 b. How much profit will each firm earn in a long-run equilibrium? R ! C = pq ! (8 + 4 q + 2 q 2 ) = 12(2) ! (8 + 4(2) + 2(2) 2 ) = 24 ! 24 = 0 c. Find the long run equilibrium price and number of firms under the market demand above. min(LRAC) = 12, so price is 12 from the demand curve, Q = 100 # of firms = Q / q = 100/2 = 50

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Now imagine that a new lump-sum inspection fee of \$2 is charged to each firm by the government (regardless of output quantity). d. First consider the short run (holding the number of firms fixed). How does short run supply change?
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Unformatted text preview: How much profit will each firm earn in the short run? Short run supply does not change (MC is unaffected by lump-sum taxes) Since profits were 0 without the fee, profit now falls to -2. e. Now consider the eventual long run equilibrium after the inspection fee is imposed. Provide a short written explanation (algebra not necessary) of what will happen and why to: Price Quantity Number of firms Long run average costs increase (by 2/ q ), resulting in an equilibrium at a lower price and lower quantity. The number of firms will fall: There is both less total output ( Q goes down) and output per firm increases ( q goes up) due to the increased fixed cost. Since number of firms = Q / q , it must fall....
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handout 2 answers - How much profit will each firm earn in...

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