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Determining equilibrium price/ quantity

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1. Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor tiles. This work is contracted out to maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market in New York are:

QS = -20 + 2P (Supply)

QD = 80 - 2P (Demand)

Where Q is thousands of hours of floor reconditioning per month, and P is the price per hour.

A.Algebraically determine the market equilibrium price/output combination.

B.Use a graph to confirm your answer.

For the graph, use prices: 10, 20, and 30,40,50,60,70,80,90

2. The figure below shows a firm in a perfectly competitive market:

a. Find the price below which the firm will go out of business.

b. What is the firm's long run supply curve?

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Solution Preview

Please refer attached file for missing graphs.

1 A. Algebraically determine the market equilibrium price/output combination.

For equilibrium, Put QD=QS
80-2P=-20+2P
4P=100
P=25
QD (at P=25)=80-2*25=30
QS(at P=25)=2*25-20=30
Equilibrium Price =$25 per hour
Equilibrium Quantity=30 thousands of hours of floor reconditioning per month.

B. Use a graph to confirm your answer.

For the graph, use prices: 10, 20, and ...

Solution Summary

There are two problems. Solution to first problem determines equilibrium price and equilibrium quantity algebraically and graphically. Solution to second problem determines the price below which a perfectly competitive firm will prefer to shut down. It also determines the firm's long run supply curve.

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