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    Competitive Markets

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    Suppose you are given the following information about a particular industry:

    QD = 6500 - 100P Market Demand
    QS = 1200P Market Supply

    C(q) = 722 + q2/200 Firm total cost function
    MC(q) = 2q/200 Firm marginal cost function

    Assume that all firms are identical and that the market is characterized by pure competition.

    a. Find the equilibrium price, the equilibrium quantity, the output supplied by the firm, and the profit of each firm.
    b. Would you expect to see entry into or exit from the industry in the long run? What effect will entry or exit have on market equilibrium?
    c. What is the lowest price at which each firm would sell its output in the long run? Is profit positive, negative, or zero at this price?
    d. What is the lowest price at which each firm would sell its output in the short run? Is profit positive, negative, or zero at this price?

    *(Please see attachment for complete problem)

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    Solution Preview

    Substitute into Qs=1200P = 1200*5 = 6000
    Thus, the market equilibrium price is P = 5 and equilibrium quantity Q = 6000.

    For each firm, derive Marginal Cost function by
    MC(q) = d C(q) / dq = q/100
    Since the market is characterized by pure competition, each firm produces at:
    MC(q) = P, or:
    q/100 = 5
    q = 500
    which is the output supplied by each firm.
    Substitute q* into
    Profit = (q*P) - C(q) = 5*500 - (722+500^2/200) = $528
    which is each firm's profit.

    (b) Would you expect to see entry into or exit from the industry in the long-run? Explain. What effect will entry or exit ...

    Solution Summary

    Competitive Markets are emphasized.

    $2.49

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