Consider an electricity market where there are three suppliers, each with constant marginal cost (a reasonable approximation in electricity genera-

tion). Firm 1 has a capacity of 200 and MC = 5. Firm 2 has a capacity of 100 and MC = 8.

Firm 3 has a capacity of 100 and MC = 10. Suppose that suppliers act as price takers.

(a) Determine the industry supply curve.

(b) Suppose that market demand is given by Q 5 540 2 20 p. Determine the mar-

ket equilibrium. Is this equilibrium a long-run equilibrium?

(c) Suppose that (i) demand falls to D (p) 5 400 2 20 p; (ii) Firm 3 reduces its MC

to 8; (iii) Firm 2 reduces its MC to 7. What happens to equilibrium prots in

each case?