Problem set 1

1. Jennifer's demand function for ice cream cones is qd Jenn = 10-2.5P at prices below $4 and zero at prices above $4. Amy's demand function is qd Amy = 9-1.5P at prices below $6 and zero at prices above $6. What is the market demand function? Graph the individual and market demand curves.

2.Suppose there are 20 low-cost bakeries that can produce bagels in St. Catharines, each of which has the supply function qs low-cost = 20 P - 10. There are 10 high-cost bakeries, each of which has the supply function qs high-cost =20P -20. Calculate and graph the individual and market supply curves.

3. Suppose the daily demand function for pizza in St. Catharines is Qd =1525-5P.For one Pizza store, the variable cost of making q pizzas per day is C (q)=3q +0.01 q2, there is a $100 fixed cost, and the marginal cost is MC = 3 +0.02q . There is free entry in the long run.

a) What is the long-run market equilibrium in this market ?

Assume in the short run, the number of firms is fixed (so that neither entry or exit is possible) and fixed costs are sunk.Also assume there is free entry in the long run. Consider the following scenario

b) The market demand decreases to Qd = 1325 -5P.

Calculate the new short-run market equilibrium, the new long-run market equilibrium. ( Characterize a market equilibrium by the equilibrium price, the equilibrium quantity, and the number of firms in the equilibrium.)