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ECF1100 Individual Assignment 2

This document contains information about market equilibrium and firm behavior under different demand and supply conditions: 1) It provides examples of a market initially at equilibrium with demand D1 and supply S1. It examines the effects of an increase in demand to D2, and then an increase in supply to S2. 2) It includes a case study of a firm producing 5 million kg per year and charging $11 per kg. However, the firm is not maximizing profits based on data provided about marginal revenue and marginal cost. 3) The optimal price for the firm to charge to maximize profits is determined to be $10, which would result in an annual profit of $26 million.

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61 views

ECF1100 Individual Assignment 2

This document contains information about market equilibrium and firm behavior under different demand and supply conditions: 1) It provides examples of a market initially at equilibrium with demand D1 and supply S1. It examines the effects of an increase in demand to D2, and then an increase in supply to S2. 2) It includes a case study of a firm producing 5 million kg per year and charging $11 per kg. However, the firm is not maximizing profits based on data provided about marginal revenue and marginal cost. 3) The optimal price for the firm to charge to maximize profits is determined to be $10, which would result in an annual profit of $26 million.

Uploaded by

xan
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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ECF1100 Individual assignment 2-

Alexander Matthews Wood

Part 1
a) Assume a market at equilibrium shown by the intersection of S1 and D1 at a price of P1 =
$3 and at a market quantity of Q1 = 20,000. Assume also that there are 50 firms operating
initially in this market. Assume that the diagram of the competitive firm above is
representative of each individual firm in this market (each firm has a total fixed cost of $100)

1) MR and AR are equal to $3

2) The quantity produced by each firm is 400

3) Total revenue received by each firm is $1200

4) Average total cost for each firm is $0.25

5) Total cost of production for each firm is $100

6) Average fixed cost for each firm is $0.25

7) Average variable cost for each firm is 0

8) Economic profit for each firm is $1100


b) Assume that there is now an increase in demand from D1 to D2 and a new equilibrium
occurs at D2 and S1 and a new equilibrium price of P2 = $5.00 and at a market quantity of Q2
= 24,000: (assume that AVC for each firm is now $3.00)

1) MR and AR are equal to $5

2) The quantity produced by each firm is 480

3) Total revenue received by each firm is $2400

4) Average total cost for each firm is $3.21 (rounded from 3.20833333333)

5) Total cost of production for each firm is $1540

6) Average fixed cost for each firm is $0.21 (rounded from 0.20833333333)

7) Average variable cost for each firm is $3

8) Economic profit for each firm is $860


c) Assume that additional firms enter and there is now an increase in supply from S1 to S2
and a new equilibrium occurs at D2 and S2 with a new market quantity of Q3 = 28,000:

1) MR and AR are equal to $3

2) The quantity produced by each firm is 400

3) Total revenue received by each firm is $1200

4) Average total cost for each firm is $1.08

5) Total cost of production for each firm is $1300

6) Average fixed cost for each firm is $0.25

7) Average variable cost for each firm is $3

8) Economic profit for each firm is -$100


Part 2

a) At the current production level of 5 million kg per year, the firm is charging $11
per kg as shown in the table above. Is the firm maximizing profit? Why or why
not? Use the following table to assist with your answer (2 marks)

Q (million P ($ per TR ($) MR ($) MC ($) TC ($) Profit ($)


kg per kg)
year)
2 14 28,000,000 14 5.80 11,600,000 16,400,000
3 13 39,000,000 11 5.80 17,400,000 21,600,000
4 12 48,000,000 9 5.80 23,200,000 24,800,000
5 11 55,000,000 7 5.80 29,000,000 26,000,000
6 10 60,000,000 5 5.80 34,800,000 25,200,000
7 9 63,000,000 3 5.80 40,600,000 22,400,000
8 8 64,000,000 1 5.80 46,400,000 17,600,000
9 7 63,000,000 -1 5.80 52,200,000 10,800,000
10 6 60,000,000 -3 5.80 58,000,000 2,000,000

The firm is not maximising profit. Marginal revenue is not closest to marginal cost at this
price. With marginal revenue at 7 and marginal cost at 5.80.

b) What price should the firm charge? How much is the annual profit then? (2 marks)
The price the firm should charge is $10. The annual profit for this firm would then be
$26,000,000.

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