Suppose that each firm in a competitive pizza market has the following identical cost: Total cost: TC=25+1.5Q2 The market demand function for the pizza market in the above question 2(a) is: Q= 120-P, where P is the price and Q is the total quantity of the pizza. Currently, there are 12 firms in the market. i. Formulate the equation or level of fixed cost, variable cost, marginal cost, average variable cost (AVC) and average total cost (ATC) for each firm. ii. Formulate each firm’s supply function based on the cost information prior to innovation and determine the market supply function in the short run. The total number of firms in the market is assumed to be fixed. iii. Calculate the price and quantity of pizza in the market and the quantity produced by each firm while the market is at the short-run equilibrium. Use a diagram to illustrate this short-run equilibrium and calculate each firm’s profit or loss. Discuss whether each firm has an incentive to leave or stay in the market.
Suppose that each firm in a competitive pizza market has the following identical cost:
Total cost: TC=25+1.5Q2
The
Q= 120-P, where P is the price and Q is the total quantity of the pizza. Currently,
there are 12 firms in the market.
i. Formulate the equation or level of fixed cost, variable cost, marginal cost,
variable cost
ii. Formulate each firm’s supply function based on the cost information prior to
innovation and determine the market supply function in the short run. The total
number of firms in the market is assumed to be fixed.
iii. Calculate the price and quantity of pizza in the market and the quantity produced
by each firm while the market is at the short-run equilibrium. Use a diagram to
illustrate this short-run equilibrium and calculate each firm’s profit or loss.
Discuss whether each firm has an incentive to leave or stay in the market.
iv. Estimate price and quantity of pizza while the market is at the long-run
equilibrium. The market demand and assumption of identical marginal cost of
each firm remain the same. Predict the quantity produced by each firm, economic
profit or loss of each firm and the market size (measured as number of firms)
when the market is at the long run equilibrium. Round your answer about the total
number of firms in the market to the nearest whole number.
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