Question

Return again to the foam finger question of last week. Recall that the market for giant foam fingers is very competitive and the cost of one firm is given by C(q) = q2 − 10q + 64.
All firms are identical and firms are free to enter or to exit the industry. In the last problem set you determined that AC is minimized when q = 8 and AC = MC = 6.
(a) The market demand for foam fingers is given by by D(p) = 520 − 20p, where p is the market price of fingers. How many fingers are consumed at the long-run equilibrium price? How many firms will be in this market in the long run?
(b) If the industry is at its long-term equilibrium number of firms (answer from part a), what is the short term supply curve of the industry? In other words what is the supply curve assuming no new firms can enter? (You must find the expression for the marginal cost of a firm and then sum horizontally (over q) the marginal cost curves of the firms in the industry.)
(c) Draw the demand curve and the short-term supply curve from part b. Label the area that represents the consumer surplus and the area that represents the producer surplus for this market (again assuming the supply curve from part b). Hint: you will need to calculate the price where Demand is zero and the price where Supply (MC) is zero. Note that MC is a negative number when supply is zero. You will need to account for this range of negative marginal cost.
(d)Calculate the consumer surplus and the producer surplus for this short-run equilibrium. How does the producer surplus compare to the total fixed costs incurred by all the firms to enter this market?



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  • CreatedAugust 05, 2013
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