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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?

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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