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Practice Problems 10

The document contains practice problems from a microeconomics course regarding long-run perfect competition. Question 1 asks about price fluctuations in the calcium market between 1990-2002 and whether there are more, fewer, or the same number of producers in 2002 compared to 1990. Question 2 involves calculating long-run equilibrium price and quantity in the mineral water market. Question 3 examines the satay grill and satay markets in long-run equilibrium and how prices may change with demand or supply shifts. Question 4 analyzes price and quantity changes in the US catfish industry between 2000-2008 to determine the type of cost structure and the likely cause of a 2003 shock.

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342 views2 pages

Practice Problems 10

The document contains practice problems from a microeconomics course regarding long-run perfect competition. Question 1 asks about price fluctuations in the calcium market between 1990-2002 and whether there are more, fewer, or the same number of producers in 2002 compared to 1990. Question 2 involves calculating long-run equilibrium price and quantity in the mineral water market. Question 3 examines the satay grill and satay markets in long-run equilibrium and how prices may change with demand or supply shifts. Question 4 analyzes price and quantity changes in the US catfish industry between 2000-2008 to determine the type of cost structure and the likely cause of a 2003 shock.

Uploaded by

Tan Pipeng
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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National University of Singapore

Department of Economics

EC2101 Microeconomic Analysis I


Semester 1 AY 2016/2017

Practice Problems 10
Long-Run Perfect Competition
Presentation schedule: Three student presentations; one student presents Question 1
and Question 2, one student presents Question 3, and one student presents Question 4.
Question 1 Suppose that the world market for calcium is perfectly competitive and
that, as a first approximation, all existing producers and potential entrants are
identical. Consider the following information about the price of calcium:
Between 1990 and 1995, the market price was stable at about $2 per pound.
In the first three months of 1996, an unexpected exogenous shock occurred
and the market price declined to $1 per pound, where it remained for the rest
of 1996.
Throughout 1997 and 1998, the market price of calcium increased, eventually
reaching $2 per pound by the end of 1998.
Between 1998 and 2002, the market price was stable at about $2 per pound.
Assuming that the technology for producing calcium did not change between 1990
and 2002 and that input prices faced by calcium producers have remained constant,
what explains the pattern of prices that prevailed between 1990 and 2002? For
simplicity, assume the shock in 1996 was either a change in the market demand or a
change in the market supply. Is it likely that there are more producers of calcium in
2002 than there were in 1990? Fewer? The same? Explain your answer.
Question 2 The long-run total cost function for producers of mineral water is
LTC(Q)=cQ, where Q is the output of an individual firm expressed as thousands of
liters per year. The market demand curve is D(P)=abP. Find the long-run
equilibrium price and quantity in terms of a, b, and c. Can you determine the
equilibrium number of firms? If so, what is it? If not, why not?
Question 3 Suppose the market for satay is perfectly competitive. All firms are
identical and the long-run total cost of production for each firm is given by
! 2
# Q + g, Q > 0
LTC(Q, g) = " 4
#
0,
Q=0
$
where g is the cost of satay grill the machine used to cook satay. Each firm requires
10000
one and only one satay grill. The market demand curve for satay is D(P) =
.
P
a) What is the long-run equilibrium price of satay? How many firms will be in the
market in the long-run equilibrium? (Your answers will be in terms of g.)
g
. Since each firm only
2
needs one satay grill, the market demand for satay grills is equal to the number of
firms in the market. Assuming the market for satay reaches the long-run equilibrium,
what is the equilibrium price of satay grills? Using the equilibrium price of satay
grills, determine the long-run equilibrium price of satay.

b) Suppose the market supply curve for satay grills is S(g) =

National University of Singapore


Department of Economics

EC2101 Microeconomic Analysis I


Semester 1 AY 2016/2017

c) Suppose the market demand for satay increases to D(P) =

25600
. The market
P

g
. Assuming the market for satay reaches
2
the long-run equilibrium, what is the new equilibrium price of satay grills? Using the
new equilibrium price of satay grills, determine the long-run equilibrium price of
satay. Based on your answer, is the market for satay an increasing-cost, constant-cost,
or decreasing-cost industry?

supply curve for satay grills is still S(g) =

Question 4 Suppose the market for catfish in the US is perfectly competitive. All
existing producers and potential entrants are identical. Below is a summary of the
price and quantity evolution in this industry between 2000 and 2008:
Between 2000 and 2002, the industry is in a long-run equilibrium.
o Market price: $3 per pound
o Total quantity demanded and supplied: 100,000 pounds
o Each firm supplies: 1000 pounds
o Number of firms: 100
In 2003, an unexpected exogenous shock occurred that affected prices and
quantities in the market. Four months after the shock, the market is in a shortrun equilibrium.
o Market price: $4 per pound
o Total quantity demanded and supplied: 120,000 pounds
o Each firm supplies: 1200 pounds
o Number of firms: 100
In 2008, the market reached a new long-run equilibrium.
o Market price: $2.5 per pound
o Total quantity demanded and supplied: 165,000 pounds
o Each firm supplies: 1100 pounds
o Number of firms: 150
The shock in 2003 might have something to do with either a change in the market
demand for catfish or a change in the market supply for catfish. Which shock most
likely explains the price and quantity dynamics in the catfish industry between 2000
and 2008? Is this industry a constant-cost, increasing-cost, or decreasing-cost
industry? Explain your answer.

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