Topic 5 Market Structure

5.1 Suppose the dining table production industry is perfectly competitive. Now consider the long run where the quantity used for all factors of production can be changed. Consider the following long-run cost information of a typical firm.

The table is like:

Number of Table per day (Q): 1,2,3,4,5,6,7

Total Cost($): 15,24,33,40,50,66,84

Average Cost($): ???????

Marginal Cost($): ???????

(a) Complete the above table by calculating the average cost and marginal cost for each of the output level.

(b) If the market price is $7, how much will a typical firm produce? If the market price is $10, how much will a typical firm produce? Explain your answer. (Assume the firm will produce if it is a break-even at the marginal unit.)

(c) What is the long-run equilibrium price and quantity of output of a typical firm? How large is the economic profit earned by each firm? Explain how you come up with your answers.

(d) If the market demand (per day) is given by Q = 10000 - 500P. How many firms are there in the industry in the long run equilibrium?

(e) If the market demand increases to Q = 12000 - 500P and there is no change in each firm's cost curves. How will it change the long run equilibrium price, equilibrium market quantity, equilibrium quantity produced by each firm and the profit of each firm? Explain your answers and describe the adjustment process.

(f) If the supply of wood decreases due to increased wildfire and the average and marginal cost of production of a typical firm increased by $2 at all quantities. How does it change the long-run equilibrium price and quantity output of each typical firm? If the demand remains at Q= 10000 - 500P, how would the number of firms in the industry change? Explain.