Problem 6. A perfectly competitive market has 1,000 firms. In the very short run
ID: 1125701 • Letter: P
Question
Problem 6. A perfectly competitive market has 1,000 firms. In the very short run, each of the firms has a fixed supply of 100 units. The market demand is given by D(p) 160, 000 10, 000P a. Calculate the equilibrium price in the very short run b. Calculate the demand schedule facing any one firm in this industry. c. Calculate what the equilibrium price would be if one of the sellers decided to sell nothing or if one seller decided to sell 200 units. d. At the original equilibrium point, calculate the elasticity of the industry demand curve and the elasticity of the demand curve facing any one seller. Suppose now that, in the short run, each firm has a supply curve that shows the quantity the firm will supply i(p) as as a function of market price. The specific form of this supply curve is given by q,(p)--200+50P. e. Using this short-run supply response, supply revised answers to (a)-(d).Explanation / Answer
a) Each firm supplies 100 units and there are 1000 firms so supply is fixed at 100,000 and demand is D = 160,000 - 10,000P
Equilibrium price is
100,000 = 160,000 - 10,000P
P* = $6
b) It will be horizontal line fixed at P = 6 and is parallel to horizontal axis
c) It will remain unchanged as one firm cannot influence the market
d) Elasticity of demand faced by one seller is infinity because demand is perfectly elastic. Elasticity of industrial demand = -10,000 x 6 / 100,000 = -0.6