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# disc7key-1 - Econ 101 Principles of Microeconomics...

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Unformatted text preview: Econ 101: Principles of Microeconomics DiscussionSection#7Solution Q1:PerfectCompetition Fall 2009    Themarketforstudydesksischaracterizedbyperfectcompetition.Firmsandconsumersare pricetakersandinthelongrunthereisfreeentryandexitoffirmsinthisindustry.Allfirms areidenticalintermsoftheirtechnologicalcapabilities.Thusthecostfunctionasgivenbelow forarepresentativefirmcanbeassumedtobethecostfunctionfacedbyeachfirminthe industry.Thetotalcostandmarginalcostfunctionsfortherepresentativefirmaregivenby thefollowingequations: 2Qs2 5Qs TC MC 50  4Qs 5  Supposethatthemarketdemandinthismarketisgivenby: Pd 1025 2Qd  a) Whatistheequilibriumpriceinthismarket?(Hint:sincethemarketsupplyisunknown atthispoint,it’sbetternottothinkoftryingtosolvethisproblemusingdemandand supplyequations.Insteadyoushouldthinkaboutthisproblemfromtheperspectiveofa representativefirm.) ANSWER:Theequilibriumpriceis25.Usethefactthat,inthelongrun,everyfirm alwaysproducesattheoutputlevelsuchthattheminimumofaveragetotalcostis attained.Also,notethefactthattheminimumofaveragetotalcostoccurswhenthe averagetotalcostisequaltothemarginalcost.GivenTC,wecangetATCby: ATC Set ATC TC Qs 2Qs 5 50  Qs MC ,thenget: 2Qs 50 Qs 5 4Qs 5  whichinturngives, 50 Qs Then, Qs 2Qs  5 ,whichistheamounteveryrepresentativefirmproducesinthelongrun. PluggingitintoMC, MC 4 5 5 25.  Note,inaperfectlycompetitivemarket,theequilibriumpricealsoequalsMC.Thus,the equilibriumpriceis25. Econ 101: Principles of Microeconomics DiscussionSection#7Solution Fall 2009   b) Whatisthelong runoutputofeachrepresentativefirminthisindustry? ANSWER:Itis5,solvedintheabovequestion. c) Whenthisindustryisinlong runequilibrium,howmanyfirmsareintheindustry? ANSWER:Therewillbe100firms.Sinceweknowthattheequilibriumpriceis25,then pluggingitintothemarketdemandfunctiongivestheequilibriumquantity, 25 1025 2Qd . i.e., Qd 500 .Sinceweknow,inthelongrunequilibrium,everyrepresentativefirm produces5andallfirmsareidentical,thenthenumberoffirmsNis 500 100.  5 N d) Whatisthelongrunindustrysupplycurve? P=25 e) Whatistheshortrunindustrysupplycurve? =4 = : = 5 4 4 + 5 5  × 100 = 25 125 Nowsupposethatthenumberofstudentsincreasessuchthatthemarketdemandcurvefor studydesksshiftsoutandisgivenby, = 1229 2  f) Intheshort run,whatwillbetheequilibriummarketquantityandprice? + 125 1229 2 =  25 30725 50 = + 125 30600 = 51  = 600 = 1229 2 × 600 = 29 g) Whatistheoutputofeachfirmintheshortrunandwhatistheprofit? 29 = 4 + 5 Eachfirmproduces6units.Profitis 29 × 6 2 × 62 5 × 6 50 = 22 h) Inthelong runwillarepresentativefirminthisindustryearnnegativeeconomicprofits, positiveeconomicprofits,orzeroeconomicprofits? ANSWER:Thelong runprofitswillbezero.Zero profitinthelongrunisapropertyof perfectcompetition.Thatisbecausenewfirmswillenterintothemarketifthereare positiveshort runprofits,whichwilldrivethelong runprofitstozero. i) Whatwillbethenewlong runequilibriumpriceinthisindustry? Econ 101: Principles of Microeconomics DiscussionSection#7Solution Fall 2009  ANSWER:Itwillstillbe25.Thelong runequilibriumpriceunderperfectcompetitionis alwaysgivenbythepointwhereATCattainsitsminimum.SincetheATCcurvehasnot changed,itstillattainsitsminimumatapriceof25. j) Atthenewlong runequilibrium,whatwillbetheoutputofeachrepresentativefirmin theindustry? ANSWER:Italsowillbe5.Sincecostcurvesdidnotchangeforeveryfirm,theoutput levelwhereATCattainsitsminimumwillstillbethesame.And,inperfectcompetition, thisoutputlevelisthelong runequilibriumoutputofeachfirm.  Q2ReturntoScale a. b. c. d. e. Constant Constant Constant Increasing Constant  Multiplechoice 1 2 3 4 5 6 d c b a a d  ...
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