Question
A typical silver mining company has a cost curve given by C(Q) = Q2 + 10,000. Quantity (Q) is measured in pounds per day and
A typical silver mining company has a cost curve given by C(Q) = Q2 + 10,000. Quantity (Q) is measured in pounds per day and cost in dollars per pound.
please answer all parts, thank you!
a) What is the MC curve of the typical firm? What is its AC curve? What is the optimal scale of the firm? Illustrate these curves and label the value of the minimum of the AC curve.
Suppose that there are 4 such typical firms in silver mining business. In addition to those 4 firms there is one firm, Silverado that has a cost advantage over the 4 other firms. The cost curve of Silverado is C(Q) = 0.5Q2 + 5000. The minimum of Silverado's AC curve is $100 and the supply curve of Silverado is QS = P.
b) If the market consists of the 4 typical firms and Silverado then what is the market supply curve?
Demand per day is QD = 1200 - 2P where price (P) is measured in dollars per pound.
c) If the market for silver is perfectly competitive then what will be the market clearing price and quantity sold? Illustrate you answer in the diagram below.
d) How much silver is sold by the typical firm at the market clearing price? Illustrate the profits of the typical firm in your diagram for part (a). Include in your diagram the inverse demand curve of the firm.
e) Given the market clearing price, are the typical firms earning normal, supernormal or subnormal profits? Briefly explain.
f) If new firms could replicate the costs of the typical firm but NOT Silverado then what do you predict will be the long run market clearing price of silver? Suppose that the market is NOT perfectly competitive. Instead Silverado sets a price in the market. The 4 remaining (typical) firms will assume that demand for their silver is perfectly elastic at the price set by Silverado (ie they are perfectly competitive). Silverado will sell the quantity to keep the price in the market at the announced price.
g) What is the residual demand faced by Silverado?
h) What quantity does Silverado sell? What will be the announced price?
i) How much silver do the 4 typical firms supply at this price? How much in total is sold in the market?
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