Suppose that the market for carwashes in California is perfectly competitive and that 10,000 carwash firms...

  

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Suppose that the market for carwashes in California is perfectly competitive and that 10,000 carwash firms are currently active in this market. Suppose also that each carwash firm's marginal cost is MC = 1+q, where q is the individual firm's quantity of carwashes supplied per hour. Market demand is Qa= 100,000 1,000P, where quantity demanded (Qa) is measured in carwashes per hour, and price (P) is measured in dollars. a. (i) What is the condition that defines each carwash firm's profit-maximizing level of output? (ii) Derive market supply. [HINT: Derive an individual firm's supply function and then scale/aggregate that up to the market level.] b. (i) What will be the equilibrium price and quantity of carwashes? (ii) How many carwashes will each individual firm supply in equilibrium? (iii) Suppose that each firm's total cost is TC = q + (q²/2) + 100. Find each individual firm's profit in equilibrium. c. (i) Based upon firms' experience, can we expect entry or exit in the long run? (ii) Can we expect the market price to decrease or increase in the long run? Provide reasons for your answers. Suppose that the market for carwashes in California is perfectly competitive and that 10,000 carwash firms are currently active in this market. Suppose also that each carwash firm's marginal cost is MC = 1+q, where q is the individual firm's quantity of carwashes supplied per hour. Market demand is Qa= 100,000 1,000P, where quantity demanded (Qa) is measured in carwashes per hour, and price (P) is measured in dollars. a. (i) What is the condition that defines each carwash firm's profit-maximizing level of output? (ii) Derive market supply. [HINT: Derive an individual firm's supply function and then scale/aggregate that up to the market level.] b. (i) What will be the equilibrium price and quantity of carwashes? (ii) How many carwashes will each individual firm supply in equilibrium? (iii) Suppose that each firm's total cost is TC = q + (q²/2) + 100. Find each individual firm's profit in equilibrium. c. (i) Based upon firms' experience, can we expect entry or exit in the long run? (ii) Can we expect the market price to decrease or increase in the long run? Provide reasons for your answers.

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ANSWER a i Each firms profitmaximizing level of output is the quantity where the marginal revenue MR ... View the full answer