Suppose that a tannery is situated on the outskirts of a small town. The private marginal cost (PMC) of producing tanned hides (in thousands of dollars per shipment) is given by P = 3 + 2.25Q where Q is shipments. In addition to the private marginal cost, an external cost is incurred. Tanning causes the discharge of toxic chemicals which, through contamination of the town's water supply, cause damage valued at external cost EC = 1.8Q (also in thousands of dollars per shipment). Even though we are concerned with a single firm, it behaves perfectly competitively. The aggregate inverse demand curve for tanned hides (in thousands of dollars per shipment), representing both the private and social marginal benefits (MB), is given by P = 27 - 0.75Q. (a) Determine the market equilibrium price and output. [2 marks] (b) Determine the socially optimal equilibrium price and output. [2 marks] (c) Based on your answers from a), b) and c) draw a graph that shows MPC, MPB, MSC, and MSB curves. [4 marks] (d) Calculate the CS, PS, and Total surplus at market equilibrium. [4 marks] (e) Calculate the deadweight loss created because of production negative externality.
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a) The market equilibrium price and output is determined where the private marginal cost (PMC) equals the marginal benefit (MB). Show more…
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Suppose that each firm in a competitive industry has the following costs: $$\mathrm{Total cost}:\quad TC=50 +{1\over2},q^2$$ $$\mathrm{Marginal cost}: MC=q$$ where $q$ is an individual firm's quantity produced. The market demand curve for this product is $$\mathrm{Demand}: Q^D=120-P$$ where $P$ is the price and $Q$ is the total quantity of the good. Currently, there are 9 firms in the market. a. What is each firm's fixed cost? What is its variable cost? Give the equation for average total cost. b. Graph average-total-cost curve and the marginal-cost curve for $q$ from 5 to 15. At what quantity is average-total-cost curve at its minimum? What is marginal cost and average total cost at that quantity? c. Give the equation for each firm's supply curve. d. Give the equation for the market supply curve for the short run in which the number of firms is fixed. e. What is the equilibrium price and quantity for this market in the short run? f. In this equilibrium, how much does each firm produce? Calculate each firm's profit or loss. Is there incentive for firms to enter or exit? g. In the long run with free entry and exit, what is the equilibrium price and quantity in this market? h. In this long-run equilibrium, how much does each firm produce? How many firms are in the market?
Akash M.
Assume the following cost data are for a purely competitive producer: $$\begin{array}{ccccc} \hline \begin{array}{c} \text { Total } \\ \text { Product } \end{array} & \begin{array}{c} \text { Average } \\ \text { Fixed cost } \end{array} & \begin{array}{c} \text { Average } \\ \text { Variable cost } \end{array} & \begin{array}{c} \text { Average } \\ \text { Total cost } \end{array} & \begin{array}{c} \text { Marginal } \\ \text { cost } \end{array} \\ \hline 0 \\ 1 & \$ 60.00 & \$ 45.00 & \$ 105.00 & \$ 45 \\ 2 & 30.00 & 42.50 & 72.50 & 40 \\ 3 & 20.00 & 40.00 & 60.00 & 35 \\ 4 & 15.00 & 37.50 & 52.50 & 30 \\ 5 & 12.00 & 37.00 & 49.00 & 35 \\ 6 & 10.00 & 37.50 & 47.50 & 40 \\ 7 & 8.57 & 38.57 & 47.14 & 45 \\ 8 & 7.50 & 40.63 & 48.13 & 55 \\ 9 & 6.67 & 43.33 & 50.00 & 65 \\ 10 & 6.00 & 46.50 & 52.50 & 75 \\ \hline \end{array}$$ a. At a product price of $\$ 56,$ will this firm produce in the short run? Why or why not? If it is preferable to produce, what will be the profit-maximizing or loss-minimizing output? Explain. What economic profit or loss will the firm realize per unit of output? b. Answer the relevant questions of 4 a assuming product price is $\$ 41$ c. Answer the relevant questions of 4 a assuming product price is $\$ 32$ d. In the table below, complete the short-run supply schedule for the firm (columns 1 and 2 ) and indicate the profit or loss incurred at each output (column 3). $$\begin{array}{cccc} \hline \begin{array}{c} \text { (1) } \\ \text { Price } \end{array} & \begin{array}{c} \text { (2) } \\ \text { Quantity } \\ \text { Supplied, } \\ \text { Single Firm } \end{array} & \begin{array}{c} \text { (3) } \\ \text { Profit }(+) \\ \text { or Loss }(-) \end{array} & \begin{array}{c} \text { (4) } \\ \text { Quantity } \\ \text { Supplied } \\ 1500 \text { Firms } \end{array} \\ \hline \$ 26 & \text {_____} & \$ \text {_____} & \text {_____} \\ 32 & \text {_____} & \text {_____} & \text {_____} \\ 38 & \text {_____} & \text {_____} & \text {_____} \\ 41 & \text {_____} & \text {_____} & \text {_____}\\ 46 & \text {_____} & \text {_____} & \text {_____} \\ 56 & \text {_____} & \text {_____} & \text {_____} \\ 66 & \text {_____} & \text {_____} & \text {_____} \\ \hline \end{array}$$ e. Explain: "That segment of a competitive firm's marginalcost curve that lies above its average-variable-cost curve constitutes the short-run supply curve for the firm." Illustrate graphically. f. Now assume that there are 1500 identical firms in this competitive industry; that is, there are 1500 firms, each of which has the cost data shown in the table. Complete the industry supply schedule (column 4). g. Suppose the market demand data for the product are as follows: $$\begin{array}{|cc|} \hline \text { Price } & \begin{array}{c} \text { Total Quantity } \\ \text { Demanded } \end{array} \\ \hline \$ 26 & 17,000 \\ 32 & 15,000 \\ 38 & 13,500 \\ 41 & 12,000 \\ 46 & 10,500 \\ 56 & 9500 \\ 66 & 8000 \\ \hline \end{array}$$ What will be the equilibrium price? What will be the equilibrium output for the industry? For each firm? What will profit or loss be per unit? Per firm? Will this industry expand or contract in the long run?
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