1. Theory of Production and Costs, Long and Short-Run Equilibrium
a. As LTC (q) = 9 + q2, the long run average cost curve of a representative Greek firm is LATC (q) = (9/q) +q, and this is minimized where the LAC is minimized when LATC=MC⇒ (9/q) + q = 2*q ⇒ q=3. Thus output per firm is 3 (see diagram, point X).
Long run domestic supply curve could be found by setting price equal to marginal cost at minimum LAC: p=2*q= (2)*(3) = 6, this supply curve is a horizontal line at p =6. In the short run, the supply curve of each firm is Qs= (0.5)*q. For the industry, Q = 10*q = 10*(0.5)*p = 5*p, so that Qs = 5*p (see diagram 1).
b. The equilibrium price and quantity of shirts in the short-run is Qs=QD ⇒5*p =150−10*p ⇒ p=10 and Q=50. The equilibrium …show more content…
Without import competition, market equilibrium will be determined by the demand and short run domestic supply curves, with p=10 € and QD= 5*p = (5)*(10) = 50 shirts. Each firm will supply 5 shirts with a profit of (10)*(5) - (9+25) = 16 €. Firms win with these larger profits, and consumers lose because of the higher price. Consumers also lose because for many of them, the price now exceeds their willingness to pay, and they will not purchase a shirt when they would have with import competition. The deadweight loss will be the area between the domestic supply curve, the total supply curve and the demand curve: ½hb = ½ (10-8)*(70-40) = 30 € (see diagram 1, ABC …show more content…
Have in mind that the points (80, 0.9) and (70, 0.7) are on the supply curve, we solve the system with 2 equation and unknown variables. So, 80 = a + b *0.9 and 70= a + b* 0.7, concluding to a= 35 and b=50. Thus, supply curve for chicken meat in 2014 (and 2013) is Qs=35+50*P. The price elasticity of supply is: εs = (ΔQ/ΔΡ)*(Ρ/Q) = (80-70)/ (0.9-0.7)*(0.9/80) = 0.56 which means that the supply of the good can be described as inelastic. (εs =1,800,000/75 = 24,000. So, Kerr Ltd current level of sales is 24,000, which means 16.66 % increase (while the new Total Revenue is 24,000*90 =2,160,000 € which means that Kerr Ltd has 16.6%
a. As LTC (q) = 9 + q2, the long run average cost curve of a representative Greek firm is LATC (q) = (9/q) +q, and this is minimized where the LAC is minimized when LATC=MC⇒ (9/q) + q = 2*q ⇒ q=3. Thus output per firm is 3 (see diagram, point X).
Long run domestic supply curve could be found by setting price equal to marginal cost at minimum LAC: p=2*q= (2)*(3) = 6, this supply curve is a horizontal line at p =6. In the short run, the supply curve of each firm is Qs= (0.5)*q. For the industry, Q = 10*q = 10*(0.5)*p = 5*p, so that Qs = 5*p (see diagram 1).
b. The equilibrium price and quantity of shirts in the short-run is Qs=QD ⇒5*p =150−10*p ⇒ p=10 and Q=50. The equilibrium …show more content…
Without import competition, market equilibrium will be determined by the demand and short run domestic supply curves, with p=10 € and QD= 5*p = (5)*(10) = 50 shirts. Each firm will supply 5 shirts with a profit of (10)*(5) - (9+25) = 16 €. Firms win with these larger profits, and consumers lose because of the higher price. Consumers also lose because for many of them, the price now exceeds their willingness to pay, and they will not purchase a shirt when they would have with import competition. The deadweight loss will be the area between the domestic supply curve, the total supply curve and the demand curve: ½hb = ½ (10-8)*(70-40) = 30 € (see diagram 1, ABC …show more content…
Have in mind that the points (80, 0.9) and (70, 0.7) are on the supply curve, we solve the system with 2 equation and unknown variables. So, 80 = a + b *0.9 and 70= a + b* 0.7, concluding to a= 35 and b=50. Thus, supply curve for chicken meat in 2014 (and 2013) is Qs=35+50*P. The price elasticity of supply is: εs = (ΔQ/ΔΡ)*(Ρ/Q) = (80-70)/ (0.9-0.7)*(0.9/80) = 0.56 which means that the supply of the good can be described as inelastic. (εs =1,800,000/75 = 24,000. So, Kerr Ltd current level of sales is 24,000, which means 16.66 % increase (while the new Total Revenue is 24,000*90 =2,160,000 € which means that Kerr Ltd has 16.6%