Question

10 pts Question 2 Consider a competitive market in which the market demand for the product is expressed as: P-86- 0.00040, and the supply of the product is expressed as: P-6 +0.0006Q. The typical firm in this market has a marginal cost of MC - 6 +0.969. a. Determine the equilibrium market price and output. Calculate the consumer surplus and the producer surplus at equilibrium in the industry. (2+2+2 - 6 points) b. Determine the output of the typical firm, given your answer to part (a) above. How many firms are there in the industry? (2+2 - 4 points)

Answer 1

A) At equilibrium, demand = supply

Or, 86 - 0.0004Q = 6 + 0.0006Q

Or, 0.001Q = 80

Or, Q = 80,000

When Q = 80,000 from any of demand or supply equation we get, P = $54

Therefore, equilibrium Market price is $54 and equilibrium market quantity is 80,000.

Demand curve's price interception is 86 and supply curve's price interception is 6.

Consumers surplus = (1/2)*(86 - 54)*80000 = $1,280,000

Producers surplus = (1/2)*(54 - 6)*80000 = $1,920,000

B) A profit maximizing perfectly competitive firm produces at the point where price = MC.

Therefore, setting MC = 54 we get, 6 + 0.96q = 54

Or, 0.96q = 48

Or, q = 50

Output of a typical firm is 50. Therefore there are (80,000/50) = 1600 firms in the industry.