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Solution to Question 1 (PPS 3)

Solution to Question 1 (PPS 3) - b To determine the...

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Solution to Question #1 on the Practice problem Set: a. Market supply is horizontal sum of individual firms’ supplies which are given by firms’ MC curves. Firm's TC = 9 + 0.1q 2 MC = 0.2q Then individual firm’s supply is given by P = MC = 0.2q We can solve for q in terms of P: P = 0.2q q = 5P (individual firm’s supply) Market supply curve is horizontal sum of all 50 firms’ supply curves: Q S = 50q=50(5P) Q S = 250P To obtain market equilibrium equate Q S and Q D to determine price and quantity 250P = 900 - 200P P = $2.00 Q = 250P = 500
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Unformatted text preview: b. To determine the individual firm's output, equate price and marginal cost: P = 2 = 0.2q q = 10 Firm's π = TR – TC = 2*10 – (9+0.1*100) = 20 - 19 = 1 c. Firms are earning economic profit so we would expect entry to occur, causing the market supply curve to shift rightward. With new firms entering industry, the market supply increases, causing the market price to fall, which in turn reduces profits that each firm is earning. This will continue until we reach long-run equilibrium at zero profit....
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