CBD Oil is produced commercially in the US, Canada, and the UK. The market is perfectly competitive
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CBD Oil is produced commercially in the US, Canada, and the UK. The market is perfectly competitive and consists of many firms who legally manufacture laboratory quality CBD Oil which is used in a wide range of retail products. Producers within a country all have identical cost structures. Each individual producer has characteristics described below:
Country | Marginal cost ($ per kg) | Annual fixed cost ($ per year) | Annual capital charge ($ per year) | Annual capacity (kg per year) | Number of producers |
US | 1200 | 800,000 | 1,200,000 | 2000 | 50 |
Canada | 1500 | 600,000 | 500,000 | 1000 | 80 |
UK | 2000 | 600,000 | 500,000 | 800 | 25 |
- Marginal costs are constant for any volume of output up to full capacity operation.
- A new facility could be built anywhere with cost and operating characteristics identical to those given in the table above. There are an unlimited number of entrants who could come into this industry.
- Once built, a facility lasts forever, unless it is permanently closed. Assume CBD oil facilities have zero salvage value.
- If the quantity demanded (in kg/year) is given by Q = 500,000 - 100P, determine the short run equilibrium price and quantity
- Consider the price you determined in part a. If firms expected the market price to remain at that level for the foreseeable future, does any producers have an incentive to enter or exit the market? Explain.
- Determine the long run equilibrium price in this market. i.e. Determine the price where entry and exit are no longer desirable.
- [for this question ignore part c.] The UK government wants to support its exports of CBD Oil. They realize that the high MC of UK based CBD Oil is mostly due to the expensive shipping rates from the UK. If the government subsidizes shipping, then the MC of UK based CBD Oil will fall to $1200/kg. Determine the long run equilibrium conditions under this new scenario.
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Authors: Melissa Barker, Donald I. Barker, Nicholas F. Bormann, Krista E. Neher
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