Suppose a typical firm’s short-run total cost curve is given by: C = 20Q2+ 4Q + 2
With a short-run marginal cost: MC = 40Q + 4
There are 120 identical firms in the market. In addition, market demand is given by Q = 100-P
a) Derive the equation for the typical firm’s short run supply curve.
b) What is the short-run equilibrium market price? Show your work.
c) At the price determined in part b), how many units will the typical firm produce?
d) At the market equilibrium, what are the profits for each firm? What will you expect to happen to the number of firms in this market over time if nothing else changes?
e) Illustrate the situation for a typical firm using a graph.
f) What would be your recommendation for each of these firms?
g) The local government decides to tax each company with a $2 per unit. Under this new situation, what are your answers to a) – f) above? Show your work.
(Hint: Marginal cost is the short-run supply for each company. So the market supply is the sum of all the short-run supplies.)