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ECON1001 Tutorial 8 S1 2014 1 Econ1001 -Tutorial 8 BRIEF ANSWERS PLEASE NOTE IT IS IMPORTANT THAT YOU WORK THROUGH THE FOLLOWING QUESTION TO ENSURE THAT YOU UNDERSTAND HOW TO SOLVE FOR A COMPETITIVE EQUILIBRIUM: 3. The oyster industry has a market demand curve given by the equation P = 100 Q/100, where P is the market price, and Q is industry-wide output.100 perfectly competitive firms currently operate in industry X. Each of these firms has a total cost function given by TC = 100 + 10q + q2, where q is the output of the individual firm. a. Would any of the firms in industry X ever shut down in the short run? If so, what is the cutoff price required for firms to operate? Hint: What is the supply curve for a firm in a perfectly competitive industry? b. What is the market output in the short run? What is the market price? How much do individual firms produce? Do firms earn economic profits? [Hint: you will first need to work out the industry supply curve.] c. What is the market price that would prevail in the long run? d. How many firms will operate in the long run? Solution: a. First, we need to calculate the other cost functions. AVC = 10 + q MC = 10 + 2q Use this information to identify that the firm would shut down in the short run if the price were to fall below 10 (min of AVC). Please draw a diagram. b. We need to calculate the market equilibrium using the market supply curve in the short run. Note that firms will earn economic profit so get students to think about what will happen at the industry level (i.e. firm entry). Industry supply: Q = 100q = 50P 500 Industry demand: P = 100 Q/100 P = 70, Q = 3000, q = 30. Firm economic profits: = 800 c. In the long run, price falls to the minimum of ATC (where marginal cost equals the minimum of ATC): since ATC = 100/q + 10 + q, min ATC at 10 + 2q = 100/q + 10 + q. Solve for q and find ATC at that q. So, in the long run, P = 30 ( = MC = min of ATC, at q=10). d. In the long run equilibrium, industry quantity…


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