Problem Set #8

Problem Set #8 - ECON 1001 Problem Set 8 Essay Background...

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ECON 1001 Problem Set 8 Essay
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Background Story: HK shirt industry is Perfectly Competitive . In Long Run Equilibrium. There are 10 firms.
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Individual Firm’s ATC = (9/q) + q ATC is minimised when q = 3 MC = 2q q is measured in millions of shirts per year. Number of firms is fixed in the Short Run, but can change in the Long Run.
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Question 1: Assume input prices are constant in LR. All potential entrants have the SAME ATC and MC functions Draw the SR and LR Market Supply on a diagram.
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Finding Supply in the Short Run: SR Firm’s Supply: P = 2q (i.e. MC) q = P / 2 This is a firm’s supply in the short run given that P > min AVC. What is min AVC? In this case the ATC is also the AVC since this is a long run story (no fixed factor present) By looking at ATC= AVC = (9/q) + q Therefore, individual firm’s supply is q = P / 2 when P is greater than or equal to $6 (given ATC is minimised when q = 3)
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Now we know individual firm’s supply function. We have to find the Market Supply
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Problem Set #8 - ECON 1001 Problem Set 8 Essay Background...

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