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Midterm Exam 2

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Q 1.Suppose you are given the following information about a particular industry:Qd=120 -P C(q)=50 +0.5q2 Assume that all firms are indentical , and that the market is characterized by perfect competition presently , there are nine firms in the industry . a. (2) Find the equilibrium price , the equilibrium quantity , the output supplied by the firm , the profit of each firm ? b.(2) would you expect to see entry into or exit from the industry in the long run ?Explain what effect will entry or exit have on market equilibrium c.(2) In the long run equilibrium ,how much does each firm produce ? how many firm are in the market ?

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Your Answer: a. MC=q=P Q=9q 120-P=9q=9P P=12 q=12 Q=9q=108 profit=12*12-(50+0.5*12^2)=22 b. I expect to see entry for the profit of each firm now is positive and it attracts more firms to entry. Entry will make the equilibrium output increase and the equilibrium price decrease until the profit of each firm equals zero.