Question

Short-Run Market Supply. New England Textiles, Inc., is a medium-sized manufacturer of blue denim that sells in a perfectly competitive market. Given $25,000 in fixed costs, the total cost function for this product is described by TC $25,000 $1Q S0.000008 Q Mc= aTCaQ = $1 + $0.00001 6Q where Q is square yards of blue denim produced per month. Assume that MC> AVC at every point along the firm's marginal cost curve, and that total costs include a normal profit. A. Derive the firm's supply curve, expressing quantity as a function of price. B. Derive the market supply curve if New England Textiles is one of 500 competitors. C. Calculate market supply per month at a market price of $2 per square yard.

Answer 1

MC = 1 + 0.000016Q

Firm's supply curve is given by

P = MC and solve for Q

P = 1 + 0.000016Q

P - 1 = 0.000016Q

Q = 1/0.000016(P - 1)

= 62500(P - 1) ( 1/0.000016 = 62500)

So  Firm's supply curve Q = 62500(P - 1)

B) Now there are 500 competitors so

n = 500

Market supply Qs = nQ

= 500 $\times$ 62500(P - 1)

= 31250000(P - 1)

C)

Market supply at P = 2

Qs = 31250000(2 - 1)

= 31250000