Modern Principles: Microeconomics
Modern Principles: Microeconomics
4th Edition
ISBN: 9781319098766
Author: Tyler Cowen, Alex Tabarrok
Publisher: Worth Publishers
bartleby

Concept explainers

Question
Book Icon
Chapter 12, Problem 11C

Subpart (a):

To determine

The elimination principle application.

Subpart (a):

Expert Solution
Check Mark

Explanation of Solution

The market equation with ‘n’ number of firm is given as follows:

QS=0.5n+0.1nP (1)

Substitute the respective values in equation (1) to calculate the market supply with 24 firms.

QS=0.5n+0.1nP=0.5(24)+0.1(24)P=12+2.4P

The market supply equation with 24 firm is QS=12+2.4P .

The equilibrium price can be calculated as follows:

Demand=Supply1002P=12+2.4P2.4P+2P=100124.4P=88P=884.4=20

The equilibrium price is $20.

Substitute the equilibrium price in the demand equation to calculate the equilibrium quantity.

QD=1002P=1002(20)=10040=60

The equilibrium quantity is 60 units.

 Individual firm output can be calculated as follows:

OutputIndividyual firm=Market outputNumber of firm=6024=2.5

Each individual firm produces 2.5 units of output.

Individual firm profit can be calculated as follows:

Profit=(Price((5×OutputIndividual firm)5+24.2OutputIndividual firm)×OutputIndividual firm)=(20((5×2.5)5+24.22.5))×2.5=(20(12.55+9.68))×2.5=(2017.18)×2.5=7.05

Individual firm’s profit is $7.05. Since there is a positive profit, there will be a new entry in to the industry.

Economics Concept Introduction

Concept Introduction:

Elimination principle: According to the elimination principle above, normal profit are eliminated by a new entry and below normal profit are eliminated by an exit.

Subpart (b):

To determine

The elimination principle application.

Subpart (b):

Expert Solution
Check Mark

Explanation of Solution

Substitute the respective values in equation (1) to calculate the market supply with 35 firms.

QS=0.5n+0.1nP=0.5(35)+0.1(35)P=17.5+3.5P

The market supply equation with 24 firm is QS=17.5+3.5P .

The equilibrium price can be calculated as follows:

Demand=Supply1002P=17.5+3.5P3.5P+2P=10017.55.5P=88P=82.55.5=15

The equilibrium price is $15.

Substitute the equilibrium price in the demand equation to calculate the equilibrium quantity.

QD=1002P=1002(15)=10030=70

The equilibrium quantity is 70 units.

 Individual firm output can be calculated as follows:

OutputIndividyual firm=Market outputNumber of firm=7035=2

Each individual firm produces 2 units of output.

Individual firm profit can be calculated as follows:

Profit=(Price((5×OutputIndividual firm)5+24.2OutputIndividual firm)×OutputIndividual firm)=(15((5×2)5+24.22))×2=(15(105+12.1))×2=(1517.1)×2=4.2

Individual firm’s profit is -$4.2. Since there is a negative profit, there will be a few exits entry in to the industry.

Economics Concept Introduction

Concept Introduction:

Elimination principle: According to the elimination principle above, normal profit are eliminated by a new entry and below normal profit are eliminated by an exit.

Subpart (c):

To determine

The elimination principle application.

Subpart (c):

Expert Solution
Check Mark

Explanation of Solution

Rearrange the individual equation qS=0.5+0.1P in terms of Price. This can be done as follows:

qS=0.5+0.1P0.1P=0.5+qSP=0.50.1+10.1qS=5+10qS

Individual supply equation is P=5+10qS .

The quantity can be calculated by equating price equation with average cost equation. This is done as follows:

Individual supplyInterms of price=Average cost5+10qS=5qS5+24.2qS10qS5qS=5+5+24.2qS5qS=24.2qS(5qS)qS=24.2qS2=24.25qS=4.84=2.2

Individual firm output is 2.2 units.

The equilibrium price can be calculated by substituting the equilibrium quantity in to the individual supply equation.

P=5+10qS=5+10(2.2)=17

The equilibrium price is $17.

The equilibrium market quantity (Output) can be calculated by substituting the equilibrium price in to the demand equation.

QD=1002P=1002(17)=10034=66

The market equilibrium quantity is 66 units.

The number of firms in the industry (Optimum number) can be calculated as follows:

Number of firm=Market quantityIndividual firms output=662.2=30

The number of firms in the industry (Optimum number) is 30. Since the number of firms in the industry is less than the 35 and greater than the 24, it is possible to get normal profit by the 30 firms.

Economics Concept Introduction

Concept Introduction:

Elimination principle: According to the elimination principle above, normal profit are eliminated by a new entry and below normal profit are eliminated by an exit.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Economics
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education