ECO 3306 Name:
Spring 2001
Dr. Charles M. North
QUIZ #4 (Chapters 23-25)
1. Hammers are sold in a perfectly competitive market with demand represented by the function
ppD 000,20000,600)( −= , where p is the market price. There are 1,000 firms producing hammers
in this market, each with technology represented by the short run cost function
000,2
80
1
)( 2+= yycs, where y is the number of hammers produced by the firm. Thus, each firm’s
supply function is ppy 40)( =.
a. (1 point) What is the industry supply function?
ppypS 000,40)(1000)( ==
b. (2 points) What is the equilibrium market price and quantity? 000,400*10*000,40000,20000,600)()( =⇒=⇒=−⇒= qppppSpD
c. (2 points) How many hammers does each firm produce, and how much profit is each firm
earning?
0000,2)400(
80
1
)400)(10(*)(**
400)10)(40(*)(
2=
+−=−=
==
ycyp
py
π
d. (1 point) Suppose that market demand increases to ppD 000,20000,800)( −= . What is the
new equilibrium price and market quantity?
333,533
3
000,600,1
)3/40)(000,40(*
33.13
3
40
*000,40000,20000,800)()(
≈==⇒
≈=⇒=−⇒=
q
ppppSpD
e. (2 points) Under this new level of demand, how much will each firm produce? What will
each firm’s profit be?
56.555,1$
9
000,14
000,2
3
1600
80
1
3
1600
3
40
)(
33.5333/1600)3/40(40)(
2
≈=−
−⋅=−=
≈==
ycpy
py
π
f. (2 points) Draw graphs of the market and a typical firm that summarizes your findings in (a)-
(e).
Q (000)
p $
y
10
13. 33
400 533
MC
400 533
AC
$1,555.56
