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Problem 1 [30 points] Suppose you are given the following information about an industry: Market demand: Q = 6500 - 100P Market supply: Q =
Problem 1 [30 points] Suppose you are given the following information about an industry: Market demand: Q" = 6500 - 100P Market supply: Q = 1200P Firm total cost function: C(q) = 722+ Firm marginal cost function: MC(q) = ; 2q 200 100 Assume that all firms are identical, and that the market is characterized by perfect competition. A. Find the equilibrium price, the equilibrium quantity, the output supplied by the firm, and the profit of each firm. [10 points] B. would you expect to see entry into or exit from the industry in the long run? Explain. What effect will entry or exit have on market equilibrium? [5 points] C. What is the lowest price at which each firm would sell its output in the long run? Is profit positive, negative, or zero at this price? Explain. [10 points] D. What is the lowest price at which each firm would sell its output in the short run? Is profit positive, negative, or zero at this price? Explain. [5 points] Problem 2 [20 points] Conigan Box Company produces cardboard boxes that are sold in bundles of 1000 boxes. The market is highly competitive, with boxes currently selling for $100 per thousand. Conigan's total and marginal cost curves are: TC = 3,000, 000 + 0.001Q2 MC = 0.002Q where Q is measured in thousand box bundles per year. 1. Calculate Conigan's profit maximizing quantity. Is the firm earning a profit? [10 points] II. Analyze Conigan's position in terms of the shutdown condition. Should Conigan operate or shut down in the short run? [10 points]
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