eco204_HW_10 - University of Toronto, Department of...

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Unformatted text preview: University of Toronto, Department of Economics, ECO 204 2008‐2009 S. Ajaz Hussain ECO 204 2008‐2009 Ajaz Hussain HW 10 Question 1 Ma‐sued Inc. uses labor (L) and capital (K) to produce output (q). In the short run, K is fixed and L is variable. Ma‐sued’s cost function is: C(q) = 50 + 4q + 2q2. Ma‐sued operates in a competitive market; currently the market price is $16. (a) Does Ma‐sued have increasing, constant, or decreasing returns with respect to labor? (b) Derive Ma‐sued’s supply curve equation. (c) At the current price, how much will Ma‐sued produce? (d) At the current price, is Ma‐sued profitable? (e) Suppose market demand is given by the equation Qd = 200 ‐ 5P. Assuming the industry consists of identical firms, how many firms are currently operating? (f) What is the market supply curve? (g) Use your answer in parts (e) and (f) to verify the current price is $16. (h) Given your answer in part (d), predict what will happen in the long run. Be specific, quantifying your answers. Hint: Predict long run price, firm output, market supply curve etc. 1 University of Toronto, Department of Economics, ECO 204 2008‐2009 S. Ajaz Hussain Question 2 (2007‐2008 Final Exam) Consider a constant cost perfectly competitive industry. Suppose each firm has cost function: C(q) = 300 + q2/3. Suppose the industry is in the short run (a) If there are 10 firms in the market. What is the equation of the industry supply curve? Show all steps and calculations clearly. Suppose the industry is in the long run. Industry demand is given by Qd = 1,000 – 20P. (b) What’s the equilibrium price and how many firms will there be in the market? Show all steps and calculations clearly. A positive demand shock shifts the initial demand curve Q = 1,000 – 20P up by $10. (c) What are the market price and each firm’s output in the short run immediately following the shock? Show all steps and calculations clearly. (d) Suppose an innovation results in all firms’ (incumbents and entrants) AC declining by $5. Compared to part (b), how many firms will there be in the long run? 2 ...
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