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Homework answers / question archive / Consider a competitive market which, in the short-run, consists of 200,000 small identical firms

Consider a competitive market which, in the short-run, consists of 200,000 small identical firms

Economics

Consider a competitive market which, in the short-run, consists of 200,000 small identical firms. The short-run total cost variable cost, average variable cost, and marginal cost of a typical firm are as given below: Q TC VC AVC MC 0 4 0 1 7 3 3.0 3 2 9 5 2.5 2 3 10 6 2.0 1 4 12 8 2.0 2 5 15 11 2.2 3 6 19 15 2.5 4 7 25 21 3.0 6 a. Find the short-run supply of a typical firm in this market. b. If the market price is 2 TL per unit of output, what is the profit of the firm? c. Find the short-run market supply in this market.

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(a) P =MC is supply equation of a perfectly competitive firm in short run. The MC should be equal or higher than AVC.

Short run supply of a typical firm in this market.

Quantity of single firm (Q) P=MC
4 2
5 3
6 4
7 6

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(b) At a price of 2, each firm will supply 4 units in short run.

The TC corresponding to 4 units of output is 12

TR = Price * Quantity

=> TR = 2 * 4

=> TR = 8

Profit of each firm:

Profit = TR - TC

=> Profit = 8 - 12

=> Profit = -4

The profit of each firm is -4.

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(c) There are 200,000 identitical firms in the short run.

Market supply: Qs = 200,000 * Q

Quantity of Market (Qs) P=MC
200,000 * 4 = 800,000 2
200,000 * 5 = 1,000,000 3
200,000 * 6= 1,200,000 4
200,000 * 7 = 1,400,000 6

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