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    Finding the long run and short run equilibrium parameters

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    Suppose honey is produced in a beehive using bees and sugar. Each honey producer uses one beehive which she rents for $40/month. Producing q gallons of honey in one month requires spending 4q dollars bees, and 2q2dollars on sugar.

    a)What is the total cost of producing q units of honey for an individual honey producer in a given month?

    b) In general, if the total cost of producing honey is a + bq + cq2, then the marginal cost of producing honey is b + 2cq. Assuming each honey producer operates as a price-taker, what is the monthly supply curve for an individual producer?

    c)Let Q be the total market supply, and q is the supply of an individual firm. Therefore, q = Q/n where n is the total number of firms in the market. Suppose the demand for honey is given by Q = 548-4P. Also, suppose there are 60 honey producers in the market. What is the equilibrium price of honey?

    d)How much profit does an individual producer make in a month?

    e) How many firms will there be in long run equilibrium? (Remember, a firm will enter the market as long as it can make a positive profit)

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    Solution Preview

    Please refer to the attached file for the full solution.

    a) What is the total cost of producing q units of honey for an individual honey producer in a given month?
    Total Cost, TC=Rental Cost+ Bees Cost+ Sugar Cost
    TC=40+4q+2q2

    b) In general, if the total cost of producing honey is a + bq + cq2, then the marginal cost of producing honey is b + 2cq. Assuming each honey producer operates as a price-taker, what is the monthly supply curve for an individual producer?
    Marginal Cost=MC=dTC/dq=d(40+4q+2q2)/dq=4+4q
    We can also use the information given in the question and directly get the Marginal Cost
    Step 1 , Compare the given format with TC function and get the values of ...

    Solution Summary

    Solution depicts the steps to estimate the short run equilibrium parameters. It also analyzes the effect of short run profits on long run equilibrium and profitability.

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