Consider an industry I with many small firms that engage in perfect competition
ID: 1106291 • Letter: C
Question
Consider an industry I with many small firms that engage in perfect competition such that the economic profits are zero. The supply curve of this industry can be approximated as P = 600 - 6Q
The demand curve in autarky can be expressed as P = 800 - 16Q
(a) Is this industry characterized by economies of scale? Why?
(b) How much will be produced in this industry in autarky? At what price?
(c) Now suppose that there is a massive trade liberalization episode and industry I can start supplying to the rest of the world. The total world demand curve is Pw = 1000 - 16Qw . How much will industry I produce now? What is the average cost of production?
(d) Now suppose there is another country that can potentially produce Q at a lower cost. The supply curve of that country is Pb = 500 - 6Qb . Will this country become the world supplier of Q? Why?
(e) At what quantity, Qb*, will this new potential supplier be able to compete with industry I?
Explanation / Answer
a) In short run, there exists economies of scale.
b) let demand = supply
800-16Q =600-6Q
200= 10Q
Q= 20
p=480
c)1000-16Q= 600-6Q
400=10q
Q=40
mc=p=600-6q
tc=integrate mc
tc= 600q -3q2
ac=tc/q
AC=600- 3q
d) now again let demand = supply
800-16q= 500-6q
300= 10q
q=30
P=320
Yes , it will become world supplier because of higher qty and lower price.