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1. The yakwool industry has ten identical firms. Each firm has a total cost function of c(r,w, y) = 100 + (rw)sy? where y indicates
1. The yakwool industry has ten identical firms. Each firm has a total cost function of c(r,w, y) = 100 + (rw)sy? where y indicates the number of bags of yakwool and r and w are input prices. This implies that the marginal cost of production is 2(rw)sy. There are a hundred identical consumers who each have income of $1000, and who consume yakwool and xenon. Their preferences are summarized in the utility function u = x0.5y .5. Because xenon is produced through a process with constant returns to scale, its price is constant, and we will assume it is one. We will denote the price of y by p. (33 marks) (a) Find firm (5 marks) and industry (2 marks) supply functions of y in the short run. (b) Find the individual (5 marks) and market (2 marks) demand functions for y. (c) Find the equilibrium price in the SR. (5 marks) (d) Find the SR profits (or losses) of each producer. Assume that r=w=1 to make life easy. (5 marks) (e) Now assume that we are in the long run, and firms can enter and exit. Find the long run competitive price (5 marks) and total quantity supplied (2 marks). Continue to assume that r=w=1. How many firms will operate in equilibrium? (2 marks)
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