Question
There are 100 firms in a competitive market, which have same technology. Each profit-maximizing firm is currently producing 300 units of output. At this output
There are 100 firms in a competitive market, which have same technology. Each profit-maximizing firm is currently producing 300 units of output. At this output level, each firm has marginal revenue of $5, average variable cost of $3, and average fixed costs of $2.
a. (1 point) Calculate market equilibrium price (P) and each individual firm's profit () in the short run.
b. (1 point) Draw a graph that illustrates the current situation for the individual firm including (horizontal) AR, (linear) MC, (U-shaped) ATC and (U-shaped) AVC curves using the values you calculated in a).
c. (1 point) (i) What is the market equilibrium output (Q*) in the market? (ii) Draw a graph that illustrates the current situation for the market including (linear) market demand and (linear) short-run supply and (horizontal) long-run supply curves using the values you calculated in a). Assume there is no change in the cost structure of each firm when other firms enter or exit the market.
Now suppose new technology has invented and distributed for free. Assume all firms in this market adopted the technology, so new MC and ATC curves shifted downward by $1 per each output.
d. (1 point) (i) If new market equilibrium price is $4, what is an individual profit-maximizing firm's new output level? (ii) Does each firm make a positive profit? (iii) Draw a graph that illustrates the new situation for the individual firm including (horizontal) AR, (linear) MC and (U-shaped) ATC.
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