Solution to Problem Set 08 _ECO100_

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

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 c) The long-run industry supply is horizontal (perfectly elastic) at
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 4

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

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online