Question-1 [15 marks]

Consider the perfectly competitive A-town market in the short run.

A-Town demand P=100-4Q.

A-Town supply is P=Qs.

TC of a typical firm in A-Town:AC=50/q+4q+4

MC=4+4q.

a.Your friend argues that she does not have enough information to calculate the total number of firms in A-Town in the short-run. You tell her you can. Find the answer. Show all working to get complete credit. [4]

b.You observe that firms are leaving A-Town in the long-run. Why might this be? Support your answer with calculations. [3]

c.How many firms will remain in this market in the long-run after the process of exit has been completed? You will need to calculate how much a typical firm produces in the LR, the LR price, and the LR market quantity. [Firms can be in decimal points] [5]

d.Comment on the size of the typical firm that remains in this new LR equilibrium. Support your answer with numbers [3]