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Suppose we are studying the market for fish & chips in the Newcastle area, which is perfectly competitive and there is free entry. All the

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Suppose we are studying the market for fish & chips in the Newcastle area, which is perfectly competitive and there is free entry. All the stores in the Newcastle area face the same long- run cost function, TCN (q) = 49 + 5g + q2. If they decide not to produce, the total cost is zero (TCN (0) = 0). Shops can sell the product at the same price p. (i) Compute the marginal cost and the average total cost for one of the shops. (10 marks) (ii) Find this shop's supply function, expressing the quantity supplied by the shop as a function of the price. (10 marks) (iii) Recall that all the fish & chips shops in the Newcastle area share the same cost function above. Also, a study has shown that the demand for fish & chips takes the following form, Qn = 235 5p. What is the long-run market price and the long-run number of shops? What is the quantity produced by each shop? What are their profits? (10 marks) (iv) Suppose that 15 out of the fish & chip shops that decided to operate in the long-run in the previous question are in North Shields one of the towns in the Newcastle area. In addition, suppose that North Shields introduces a constant subsidy of 33 for each of these 15 fish & chips shops if q > O, that is, each of the 15 shops gets a 33 cheque from the city council if they decide to produce a positive quantity of fish & chips. What is the new cost function for one of North Shields fish & chips shops (denote it by FC (q))? And compute the marginal cost and average total cost for this shop, as well as the supply curve. Does the marginal cost change? Why or why not? (10 marks)

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