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Microeconomics

(PGP I)

Problem Set V

1. Daves Fresh Catfish is a northern Mississippi farm that operates in the perfectly
competitive catfish farming industry. Daves short-run total cost curve is

2
, where is the number of catfish harvest per month. The corresponding short-
run marginal cost curve is . All of the fixed costs are sunk.
(a) What is the equation for the average variable cost ()?
(b) What is the minimum level of average variable costs?
(c) What is Daves short-run supply curve?

2. Newsprint (the paper used for newspapers) is produced in a perfectly competitive market.
Each identical firm has a total variable cost TVC (Q) = 40Q + 0.5Q
2
, with an associated
marginal cost curve SMC(Q) = 40 + Q. A firms fixed cost is entirely nonsunk and equal to
50.
a) Calculate the price below which the firm will not produce any output in the short run.
b) Assume that there are 12 identical firms in this industry. Currently, the market demand for
newsprint is D(P) = 360 2P, where D(P) is the quantity consumed in the market when the
price is P. What is the short-run equilibrium price?

3. There are currently 10 identical firms in the perfectly competitive gadget manufacturing
industry. Each firm operates in the short run with a total fixed cost of F and total variable cost
of 2Q
2
, where Q is the number of gadgets produced by each firm. The marginal cost for each
firm is MC = 4Q. Each firm also has non sunk fixed costs of 128. Each firm would just break
even (earn zero economic profit) if the market price were 40. (Note: The equilibrium price is
not necessarily 40 when there are 10 firms in the market.)
The market demand for gadgets is Q
M
= 180 2.5P, where Q
M
is the amount purchased in the
entire market.
a) How large are the total fixed costs for each firm? Explain.
b) What would be the shutdown price for each firm? Explain.
c) Draw a graph of the short-run supply schedule for this firm. Label it clearly.
d) What is the equilibrium price when there are 10 firms currently in the market?
e) With the cost structure assumed for each firm in this problem, how many firms would be in
the market at an equilibrium in which every firms economic profits are zero?

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4. A market contains a group of identical price taking firms. Each firm has a marginal cost
curve SMC(Q) = 2Q, where Q is the annual output of each firm. A study reveals that each
firm will produce if the price exceeds \$20 per unit and will shut down if the price is less than
\$20 per unit. The market demand curve for the industry is D(P) = 240 P/2, where P is the
market price. At the equilibrium market price, each firm produces 20 units. What is the
equilibrium market price, and how many firms are in this industry?

5. A competitive industry consists of 6 type A firms and 4 type B firms. Each firm of type A
operates with the supply curve:

Each firm of type B operates with the supply curve:

a) Suppose the market demand is
At the market equilibrium, which firms are producing, and what is the equilibrium price?
b) Suppose the market demand is
At the market equilibrium, which firms are producing, and what is the equilibrium price?

6. During the week of February 915, 2001, the U.S. rose market cleared at a price of \$1.00
per stem, and 4,000,000 stems were sold that week. During the week of June 511, 2001, the
U.S. rose market cleared at a price of \$0.20 per stem, and 3,800,000 stems were sold that
week. From this information, what would you conclude about the price elasticity of supply in
the U.S. rose market?