Consider a market where demand is described by QD=1406P. An individual firm in this market can supply quantity qs=P2 in the short run, for any price above 2.

a. If only two firms exists in the market and they act competitively, find the equilibrium price and quantity, and calculate producer and consumer surplus. If you know firms earn zero profit, what must their fixed cost be? (recall that in the short run = and assume as usual in the competitive model that firms have identical costs)

b. Calculate the elasticities of market supply and market demand at the equilibrium point. Which one is more elastic?

c. Now suppose demand for this good jumps to QD=2206. What will happen in this market immediately afterwards? (i.e. before price has the chance to adjust) Draw a graph, showing the relevant quantities and surpluses. Show whether either producer or consumer surplus increase.