ECON 600 - Microeconomic Theory

PART 2 Please show your work and fully annotate all graphs. Simplify your answers only to the extent that it will help you answer the problems. Explain ALL your answers, unless specified otherwise. Feel free to use a calculator. 2 All firms in the competitive jawbreaker (giant gumball) industry has a total cost function of: c(q) = =q+ 10 q' + 10 where q is the number of jawbreakers produced by the firm. The demand for this product is defined by the function: 1 P = 4 1000 where Q is the total number of jawbreakers in the market and P is the price of a jawbreaker in dollars. (a) What is the long-run market price and quantity in this market? How many firms will produce jawbreakers? (b) Assume that a study is released revealing that four out of five dentists believe that jawbreakers promote tooth decay. Demand plummets to: 4 P = 3 - 875 Assume that the number of firms is fixed in the short run. What is the industry's short-run supply curve? What is the new market equilibrium price and quantity? How much does each firm earn in profits? (c) Do you expect the number of firms to increase or decrease in the long run following the shock to the market place? Do you expect the market equilibrium price to increase or decrease in the long run