Explore BrainMass
Share

Explore BrainMass

    Short and long run equilibrium analysis

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Currently 10 identical bakeries are producing bread in a competitive market. The cost function for a typical bakery is:
    Ci = 6qi + 0.01qi2 + 100.
    The demand for bread is:
    q = 1800 - 100p

    (a) What is the short run market supply curve?

    (b) What will be the equilibrium price and volume of bread sales in the market?

    (c) At the equilibrium of (b) what is the output per bakery? Are bakeries incurring losses, making profits, or breaking even?

    (d) The government imposes a $1 per loaf tax on bread (let them eat cake!). In the short
    run what will be market volume and price, and output per bakery? Will individual
    bakeries suffer a short-run loss, and if so, how much?

    (e) What will be the long run response of market price and volume to imposition of the $1 per loaf tax? How many bakeries will remain, and what will be output per bakery?

    © BrainMass Inc. brainmass.com April 1, 2020, 3:46 pm ad1c9bdddf
    https://brainmass.com/economics/general-equilibrium/short-and-long-run-equilibrium-analysis-212691

    Attachments

    Solution Preview

    Solution is also attached as word document.

    Solution:

    (a) What is the short run market supply curve?

    Ci = 6qi + 0.01qi2 + 100
    Marginal Cost = MCi = dCi/dqi =6+0.02qi
    In perfect competition p=MC
    p=6+0.02qi
    0.02qi=-6+p
    qi = -300+50p
    Market supply curve
    Q=10*qi=10*(-300+50p)=-3000+500p
    Qs=-3000+500p

    (b) What will be the equilibrium price and volume of bread sales in the market?

    Qd=1800-100p
    Qs=-3000+500p
    For equilibrium Qd=Qs
    1800-100p=-3000+500p
    600p=4800
    p=8

    Qd=1800-100*8=1000
    Qs=-3000+500*8=1000

    Equilibrium price =$8

    Equilibrium quantity = 1000

    (c) At the equilibrium of (b) ...

    Solution Summary

    Solution describes the steps for finding short run equilibrium volumes and prices for identical bakeries. It also analyses the impact of tax on loaf of bread.

    $2.19