Economics (Industrial Organization)?

Question

The market demand for a good is Q(P) = 200 - 4P. Each …firm that produces this good has a marginal cost of production given by c = 10 + 2q

(a) Draw a graph that shows marginal costs of a single …firm and industry marginal costs if there are 2 fi…rms in the industry.

(b) Suppose there are 24 fi…rms in the market. If the …firms are competitive, what is the market Supply function (Quantity supplied as a function of price)?

(c) Determine the competitive equilibrium (price and quantity)

(d) Draw a graph that shows the Competitive equilibrium and the surplus to Consumers and Producers.

Answer 1

(a)

One firm marginal cost:

MC=10+2Q

Two firms marginal cost

MC=10+Q

(b)

Minimal point for any firm: AC=MC

Supply curve combining 24 firms:

MC=10+Q/12

(above ATC=MC point for long-run and above AVC=MC for short-run)

MC=P

P=10+Q/12

Q/12=P-10

Q=12P-120

(c)

200-4P=12P-120

320=16P

P=20

Q=120

(d)

Consumer surplus area of triangle below demand curve and above equilibrium price

P(max)=50

P(equilibrium)=20

Consumer surplus = (50-20) * 120 / 2 = 1800

Producer surplus area of triangle below equilibrium price and above supply curve:

P(min)=10

P(equilibrium)=20

Producer surplus= (20-10) * 120 / 2 = 600

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