Marginal Cost (MC) and Optimal Quantities (Q*) for Three Firms (worth 35%) Assum
ID: 1200669 • Letter: M
Question
Marginal Cost (MC) and Optimal Quantities (Q*) for Three Firms (worth 35%) Assume that there are three characteristic firms in an industry: types A, B, and C. Each type has their own production technology and marginal costs of production. Their output levels for different levels of marginal cost are provided in Table 4. 3(a). Assume that only one of each type of firm-A, B, and G-exist in the market. Create the industry (market) supply curve. 3(b). What is the total quantity supplied (Qs) to the market when the price in the market is $80? 3(c). Assume that the (inverse) market demand curve is P = 145 - (0.13)Q. Graph the supply and demand curves in this market. (To make this easier, you should only use the quantities that were found in the creation of the industry supply curve in Question 3(a).) 3(d). What Ls the equilibrium price in this market? (You may give an approximation and use a value from Table 4.) 3(e). Assume that each type of firm lias a different ATC when they are maximizing profit at the equilibrium price (P_e) found in Question 3(d). These ATC values are given in Table 5. What is the profit earned by each type of firm at the equilibrium price?Explanation / Answer
a) When P=MC then there is pareto optimality. And at pareto optimality means there is no one can be better off without damaging anybod. So here Pwill be equal to MC and Industry supply curve will be equal to A+B+C
b) At P=$80 Qs will be 280+210+300= 790. It can be also seen from table and graph.
c) P = 145 - 0.13Qd so Qd = (145-P)/0.13
d) Equilibrium as seen from table and graph is approximately at P=$62 and Q=637
MC A B C P Market Supply=A+B+C Market Demand Qd = (145-P)/0.13 30 130 110 125 30 365 885 45 175 140 177.5 45 492.5 769 58 214 166 223 58 603 669 62 226 174 237 62 637 638 70 250 190 265 70 705 577 75 265 200 282.5 75 747.5 538 80 280 210 300 80 790 500 85 295 220 317.5 85 832.5 462 91 313 232 338.5 91 883.5 415 95 325 240 352.5 95 917.5 385