BEO2264 MICROECONOMIC ANALYSIS

this unit chaged a lot since I learned, but the lecturer is good.
the assignment is part of calculation, and part of short answers. it also needs to draw figures, but I can not upload the figure here, so just calculation and short answers.

QUESTION 1 (10 marks)


The market demand and supply curves for a product are P = 100 - 0.015Q and P = 10 + 0.005Q. The typical competitive firm in the market has a total cost of production: TC = 5 + 2.5q + 5q2.

(a) Calculate the market equilibrium price and quantity. Calculate how much the typical firm will produce at the equilibrium price.

Pd = 100 - 0.015Qd and Ps = 10 + 0.005Q¬s at equilibrium point Pd=Ps Qd=Qs

So 100 - 0.015Q=10 + 0.005Q Q = 4,500

P = 100 – 0.015Q = 32.5

For the typical firm @ equilibrium price

MC = d TC / d Qf = 2.5 + 10Qf = P =32.5

Qf = 3

(b) Calculate the amount of profit and producer surplus for the typical firm.

Profit = TR – TC = 3×32.5 – (5 + 2.5×3 + 5×32) = 97.5 – 57.5 = 40

Producer surplus = (32.5 – 2.5) ×3/2 = 45

(c) Show your results to parts (a) and (b) in a diagram.

Shown as Appendix.

(d) If all firms had the same cost structure, how many firms would compete in the market?

As calculated, Q = 4500 Q¬¬f =3, 4,500/ 3 = 1,500

So there are 1,500 firms in the market.

(e) What is likely to happen to market equilibrium price in the long run? Explain.

As our calculation, the firms can make economic profit in this industry in the short run. So there will be more and more firms this industry in the long run. And then the supply curve will shift to right. So the equilibrium point will move downward. The equilibrium price will fall and stop when the price of the product is equal to the long run average cost of producing the product.

QUESTION 2 (No more than one page in length)

Imagine you are working in the DVD rental industry. Answer the following two questions.

(a) What do you think the supply elasticity for DVD is? Explain your answer (3 marks).

In my opinion, the supply of DVD is elastic. Elasticity is the ratio of the proportionate change in one variable with respect to proportional change in another variable, such as the responsiveness of the price of a commodity to changes in market demand or visa-versa. As we know, the purpose of a firm is maximizing the profit, when there is a profitable market, many new firms will like to enter this market. Besides new firms, the existing firms will increase the output to get more profit. In the DVD market, the cost of producing DVD is almost constant, the cost includes: cost of copyright, the cost of tax, the cost of issue and so on. If the cost is constant, increase the price, there will be more profit, so the output in this market is increase obviously. In contact, if the price of DVD is decreased, a lot of firm will exit the market, the change of supply is also clearly. In conclusion, more matter increase or decrease the price, and the percentage increase or decrease in the quantity supplied exceeds the percentage increase in the price. The supply of DVD is elastic.



(b) Would and increase in demand for DVD rentals lead to an increase in the rental price of DVDs, or do you think the industry characterised by constant costs in the long run? Explain your answer (7 marks).

To answer this question, we should consider the supply elasticity for DVD rental market. There is almost no enter barrier in this market, everyone can get into this market. If a firm rises its price, no one will rent DVD from this firm. So the price can affect the quantity a lot. DVD rental supply is elastic. Go back to the question, if rental price is increase, the quantity of rent will be decrease a lot. There will less profit for the company, and the company is not expected this happen. The behaviour is not good for maximizing profit. If the price durative grow up, the potential customers will choose download the movie from Internet or buy a DVD from Movie Shop directly. So even though increase in demand for DVD rentals, it doesn’t lead to an increase in rental price of DVDs. And another aspect, the cost of DVD rental is already constant. The main cost of DVD rental is the price of DVD, but now the technology for making DVD is maturely. As development of technology, some new products have already come into the market, like Blue-Ray Disk, but in a certain period, the BRD can not substitute DVD. DVD rental shop will still use DVD as their main products. So industry characterised by constant costs in the long run.