QUESTIONS 1. Suppose that widgets are produced by a monopolistically competitive
ID: 1109676 • Letter: Q
Question
QUESTIONS 1. Suppose that widgets are produced by a monopolistically competitive industry. If each firm in this market has the same cost structure and charges the same price, then Q-S/n. Assume that the demand curve is such that b-1/20. The cost function for any given producer is given by: TC=3,000 + (4 x Q) Suppose there are two countries Home and Foreign and Home has a market size S 2,400 widgets and Foreign has market size Sp 1,350 widgets. Assume that both countries have the same costs of production and demand curve Find the equilibrium number of firms and the equilibrium price and quantity in the long a. for each country in the absence of trade.Explanation / Answer
Home country:
Q = SH × b
= 2,400 × (1/20)
= 2,400 × 0.05
= 120
Also given, Q = S / n
120 = 2,400 / n
n = 20
Answer: The equilibrium number of firms is 20.
TC = 3,000 + 4Q = 3,000 + 4 × 120 = 3,480
ATC = TC / Q
= 3,480 / 120
= 29
In the long-run the market price would be the minimum of ATC; this is the situation where (Price = MC = ATC), and a firm would enjoy 0 economic profit. Therefore, the required price is $29.
Answer: The equilibrium price is $29.
Equilibrium quantity = Q / n = 120 / 20 = 6 units (Answer)
Foreign country:
Q = SF × b
= 1,350 × (1/20)
= 1,350 × 0.05
= 67.5
Also given, Q = S / n
67.5 = 1,350 / n
n = 20
Answer: The equilibrium number of firms is 20.
TC = 3,000 + 4Q = 3,000 + 4 × 67.5 = 3,270
ATC = TC / Q
= 3,270 / 67.5
= 48.44
In the long-run the market price would be the minimum of ATC; this is the situation where (Price = MC = ATC), and a firm would enjoy 0 economic profit. Therefore, the required price is $48.44.
Answer: The equilibrium price is $48.44.
Equilibrium quantity = Q / n = 67.5 / 20 = 3.375 units (Answer)