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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. 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.
Expert Solution
(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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