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shows the marginal product of labor. Notice that as we move down the table, the values of the marginal
product of labor decrease: each additional unit of labor we hire results in output increasing, but at a
decreasing rate.
L
K
Q
*
MP
l
0
25
0
---
1
25
20
20/1 = 20 units of output per unit of labor
4
25
40
20/3 = 6.67 units of output per unit of labor
9
25
60
20/5 = 4 units of output per unit of labor
16
25
80
20/7 = 2.86 units of output per unit of labor
25
25
100
20/9 = 2.22 units of output per unit of labor
* Note that the values of Q were actually calculated in (a).
2. Consider the perfectly competitive industry for gadgets where there are initially 10 identical firms
producing. Each firm has the same MC and TC curves and these curves are given by the following
equations where TC is total cost, q is the amount of gadgets produced by a firm, and MC is the marginal
cost:
TC for each firm: TC = 4 + 5q + q
2
MC for each firm: MC = 5 + 2q
You also know that the market demand curve is given by the following equation where P is the price per
gadget and Q is the total amount of gadgets demanded in the market:
Market Demand for Gadgets: Q = 17 – P
a. Given this information, the first thing you need to do is to determine the short-run equilibrium. But,
you cannot do this until you find the market supply curve. This will take some work: you will need to
have some conceptual knowledge (the market supply curve is the horizontal summation of the firms’ MC
curves) and some creativity (you will need to figure out how to get a second point that lies on the
individual firm’s MC curve and then extrapolate from this point to the market supply curve). Find the
market supply curve and show the work you did to find this curve.
b. Given the information and the market supply curve you found in (a), compute the short-run equilibrium
market quantity (Q), the short-run equilibrium price (P), and the short-run level of production for a
representative firm (q). Show your work.
c. Given your work in (b), determine the level of short-run profits for a representative firm in this
industry? Given your calculation will the representative firm produce in the short-run? Explain your
answer. Given your calculation what do you predict will happen in this industry in the long-run? Explain
d. Calculate the long-run equilibrium price (P’), long-run equilibrium market quantity (Q’), the long-run
equilibrium firm quantity (q’), and the level of profits in the long-run for a representative firm. Show your
work. In the long-run how many firms will be in this industry?
3

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