Tute 7answers - Introductory microeconomics ECON1001...

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Tutorial 7 Week 8 1. With the use of a diagram explain the difference between a competitive firm’s short-run supply curve and its supply curve in the long run. Why would a firm continue to produce in the short run even when it is making a loss and knows that it will exit the industry in the long run? The short-run supply curve is MC above point a The long-run supply curve is MC above b. (see lecture notes and textbook for reasoning) 2. Industry X has a market demand curve given by the equation P = 100 – Q/100, where P is the market price, and Q is industry-wide output.100 perfectly competitive firms currently operate in industry X. Each of these firms has a total cost function given by TC = 100 + 10q + q 2 , where q is the output of the individual firm. (a) Would any of the firms in industry X ever shut down in the short run? If so, what is the cut-off price required for firms to operate? (b) What is the market output in the short run? What is the market price? How much do individual firms produce? Do firms earn economic profits? [Hint: you will first need to work out the industry supply curve.] (c) What is the market price that would prevail in the long run? (d) How many firms will operate in the long run? 2.a. First, we need to calculate the other cost functions. AVC = 10 + q MC = 10 + 2q Note that AVC is a linear function – it is not U-shaped like in lectures. It is minimised when q = 0 (clearly, q<0 makes no sense). At this point, MC = 10 (=AVC). So, the firm would shut down in the short run if the price were to fall below 10. q
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This note was uploaded on 08/18/2011 for the course ECON 1001 taught by Professor - during the Three '07 term at University of Sydney.

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Tute 7answers - Introductory microeconomics ECON1001...

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