Solution to Problem Set 08 _ECO100_

# Solution to Problem Set 08 _ECO100_ - Prof Gustavo Indart...

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Prof. Gustavo Indart Department of Economics University of Toronto ECO 100Y INTRODUCTION TO ECONOMICS Solution to Problem Set 8 1.a) i) Po = \$10 and Qo = 2,000 units ii) q = 100 units and Profit = 0 iii) # Firms = Q/q = 2000/100 = 20 iv) Yes. Economic Profit = 0 => long-run equilibrium b) i) Ps = \$15 and Qs = 3,000 ii) Each firm increases q from 100 to 150 (where MC = new MR) iii) Profit = 150 (15 - AC) = 150 (15 - 13) = \$300 c) Entry shifts Supply right until P = \$10 gives 0 economic profit and long-run equilibrium d) i) P 1 = 10 and Q 1 = 4,000 ii) q = 100 and Economic Profit = 0 iii) # Firms = Q/q = 4000/100 = 40 2.a) Q = 700 where P = SMC 2 Profit = (P-AC)Q = (\$12 - \$9.50)*700 = \$1,750 b) The larger plant's profit (\$1,750) is at the moment larger than the smaller plant's profit (approximately (\$12 - \$9)*500 = \$1,500) at \$12. [Note that total profit for the larger plant is larger even though profit per unit for the smaller plant is larger]. However, in the long-run, firms enter the industry pushing economic profit to 0; price will therefore fall to \$8 (break-even point for smaller plant) leaving the larger firm with economic losses and eliminating the larger plant. [Owners may operate the larger plant at economic losses less than fixed costs until the plant wears out but no new such plants will be built). Moreover, there must exist a plant size that generates even lower average costs than plant 1, i.e., the plant that produces minimum long-run average cost of @\$7.60 at 550.

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2 c) The long-run industry supply is horizontal (perfectly elastic) at
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## This note was uploaded on 08/10/2010 for the course ECONOMICS ECO100Y taught by Professor Furlong during the Summer '09 term at University of Toronto.

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Solution to Problem Set 08 _ECO100_ - Prof Gustavo Indart...

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