Relationship between firm decisions and market supply


Question: The following problem traces the relationship between firm decisions, market supply, and market equilibrium in a perfectly competitive market.

a. Complete the following table for a single firm in the short run:

output

tfc

tvc

tc

avc

afc

atc

mc

0

300

0

300

 

 

 

 

1

300

100

400

100

300

400

100

2

300

150

450

75

150

225

50

3

300

210

510

70

100

170

60

4

300

290

590

72.5

75

147.5

80

5

300

400

700

80

60

140

110

6

300

540

840

90

50

140

140

7

300

720

1020

102.9

42.9

145.8

180

8

300

950

1250

118.8

37.5

156.3

230

9

300

1240

1540

137.8

33.3

171.1

290

10

300

1600

1900

160

30

190

360

b. Using the information in the table, fill in the following supply schedule for this individual firm under perfect competition, and indicate profit (positive or negative) at each output level.  Hint: at each hypothetical price, what is the MR of producing one more unit of output? Combine this with the MC of another unit to figure out the quantity supplied.

Price                Quantity Supplied                   Profit

$50

70

100

130

170

220

280

350

c. Now suppose there are 100 firms in this industry, all with identical cost schedules.  Fill in the market quantity supplied at each in this market:

Price                        Market Quantity Supplied                  Market Quantity Demanded

$50                                                                                          1,000

70                                                                                            900

100                                                                                          800

130                                                                                          700

170                                                                                          600

220                                                                                          500

d. Fill in the blanks: From the market supply and demand schedules in c., the equilibrium market price for this good is _____ and the equilibrium market quantity is ____. Each firm will produce a quantity of ___and earn a ___(profit/loss) equal to ____.

e. In d., your answers characterize the short run equilibrium in this market. Do they characterize the long-run equilibrium as well? If yes, explain why. If no, explain why not (that is, what would happen in the long run to change the equilibrium and why?)

Solution Preview :

Prepared by a verified Expert
Macroeconomics: Relationship between firm decisions and market supply
Reference No:- TGS02097902

Now Priced at $25 (50% Discount)

Recommended (90%)

Rated (4.3/5)