Question
The following graphs illustrate the jewellery market as a perfectly competitive market. The left-hand figure shows the market demand and supply curves; the right-hand figure
The following graphs illustrate the jewellery market as a perfectly competitive market. The left-hand figure shows the market demand and supply curves; the right-hand figure shows a representative firm. Assume the market is in the long-run equilibrium.
(a) Demand for jewellery is given by D1 = 216?24P and the supply function is S1 = ?40 + 40P. Compute the market equilibrium price and quantity. (b) Suppose each firm's average total cost is given by AT C = 1 + 1.5Qfirm, where Qfirm is the quantity produced by an individual firm.1 What is the quantity Qfirm produced by each firm in the long-run equilibrium? (c) How many firms operate in this market in the long-run equilibrium? (d) Assume the economy slows down, leading to a permanent drop in the demand for jewellery. Discuss how this change in demand affects the jewellery market in the short and long-run. In particular, you should discuss how, in the short and long-run, the drop in demand affects prices, profits, production quantities, and the number of firms. You may use graphs similar to the ones provided above to support your answer. e) Computer-aided design has made jewellery production significantly faster/less expensive. Discuss how the decrease in production costs, i.e., in average total cost and marginal cost, should affect the jewellery market in the short and long-run.
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