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(Solved): Task 7 Supply under perfect competition Due to extremely weak demand for washing machines in a count ...
Task 7 Supply under perfect competition Due to extremely weak demand for washing machines in a country, every firm in the industry appears to make losses. This development comes as a surprise to many market observers since the number of suppliers and their supply plans did not change compared to the previous quarter where each firm made some economic profit. In the country, washing machines produced by different firms are essentially identical, so that consumers view them as homogeneous products. The current market price for washing machines is P = $750. WashingRobots is one of the producers of washing machines and its management is concerned with its future in the face of its present losses. In order to make a rational decision, it ordered a management consultancy to provide it with advice. As a first step, the consultancy inquired into the cost processes of the firm that are represen- tative for the industry. The firm's total short run cost of production depending on the number q of washing machines that it supplies is estimated to be: C(q) = 5,000+50q². As a second step it provides the firm with a profit maximizing supply plan (i.e., a short run supply curve) and indicates market price intervals where the firm makes an economic profit and economic losses. Based on this supply plan, the consultancy recommends: "For the current quarter, we do not recommend you to shut-down your production as some of your competitors did if you want to minimize your loss." Since the management of Washing Robots is interested in the long-run behavior of the industry, the consultancy analyzed likely long-term developments: "Due to huge losses of some of your competitors, we have strong reasons to believe that many of them are in the process of exiting the market. We also expect that the current market situation of extreme weak demand is an exception - market demand will stabilize at a somewhat higher level where you can expect economic profits if you follow our suggested supply plan. Note that these economic profits will fade away over time as the industry reaches its long-run equilibrium." Assignment 1. Derive the firm's marginal, average, and average variable cost curves. 2. Confirm that the firm is making a loss at P =$750. 3. Use the short run cost function to find an explicit mathematical expression of the short run supply curve of the company. Hint: In a perfectly competitive market, P=MC. You have to rearrange this expression to get to the supply curve (q as a function of P instead of P as a function of q). 4. Indicate in which intervalls the firm makes a loss or a profit. 5. Explain why the consultancy does not recommend that the firm shut down. 6. Use graphs to sketch and explain the long-term developments (no calculations required for this part). You can assume for simplicity that the fixed factors of production are at their optimal long run levels (put simply, the factory already has the "right" size).
Task 7 Supply under perfect competition Bue to extremely weak demand for uashing machines in a country, every firm in the industry appears to make losses. This development comes as a surprise to many market observers since the number of suppliers and their supply plans did not change compared to the previous quarter where each firm made some economic profit. In the country, washing machines produced by different firms are essentially identical, so that consumers view them as homogeneous products. The current market price for washing machines is . Washing Robots is one of the producers of washing machines and its management is concerned with its future in the face of its present losses. In order to make a rational decision, it ordered a management consultancy to provide it with advice. As a first step, the consultancy inquired into the cost processes of the firm that are representative for the industry. The firm's total short run cost of production depending on the number of washing machines that it supplies is estimated to be: As a second step it provides the firm with a profit maximizing supply plan (Le, a short run supply curve) and indicates market price intervals where the firm makes an economic profit and economic losses. Based on this supply plan, the consultancy recommends: "For the current quarter, we do not recommend you to shut-down your production as some of your competitors did if you want to minimize your loss." Since the management of Washing Robots is interested in the long-run behavior of the industry, the consultancy analyzed likely long-term developments: "Due to huge losses of some of your competitors, we have strong reasons to believe that many of them are in the process of exiting the market. We also expect that the current market situation of extreme weak demand is an exception - market demand will stabilize at a somewhat higher level where you can expect economic profits if you follow our suggested supply plan. Note that these economic profits will fade away over time as the industry reaches its long-run equilibrium." Assignment 1. Derive the firm's marginal, average, and average variable cost curves. 2. Confirm that the firm is making a loss at . 3. Use the short run cost function to find an explicit mathematical expression of the short run supply curve of the company. Hint: In a perfectly competitive market, . You have to rearrange this expression to get to the supply curce ( as a function of instead of as a function of q).