answer 6 - Fall 2010 Answers to ECON-314-03/04 Assignment 6...

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Answers to ECON-314-03/04 Assignment 6 1. (i) Notice that: MC(q) = 2 + 2q. Then, the SR profit-maximizing output level, * q , is determined by: P ) q ( MC * = , or 6 q 2 2 * = + , which gives: * q = 2. Then, 2 ) 2 2 2 2 ( 2 6 ) q ( C Pq ) q ( 2 * * * = + × + - × = - = π , which is positive. Thus, a firm supplies in the SR. (ii). Notice that: q 2 q q q 2 q ) q ( VC ) q ( AVC 2 + = + = = , MC(q) = 2 + 2q. Then, MC(q) AVC(q), for any q. Thus, the entire MC-curve is the firm’s SR S-curve. As a consequence, the firm’s SR S-function is: P=MC(q), or P = 2 + 2q, or q=(P – 2)/2. (Note: If P < 2, VC(q) > Pq; the firm shuts down.) (iii). When P=$6, the total market demand is: Q=10,000 – 1,000(6)=4000. Then, the number of firms supplying the market is: 000 , 2 2 4000 q Q n * = = = . (iv). No, because incumbents are making positive profits, which results in new firms entering the market. The higher market supply will cause the market equilibrium price to decline until it reaches the LR equilibrium price. 1
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This note was uploaded on 03/17/2012 for the course ECON 314 taught by Professor Qian during the Spring '10 term at Saint Louis.

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answer 6 - Fall 2010 Answers to ECON-314-03/04 Assignment 6...

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