Suppose the market demand for milk is Q^d =150-5P. Additionally, suppose that a dairy's variable costs are VC = 2Q² (where Q is the number of gallons of milk produced each day), its marginal cost is MC =4Q and there is an avoidable fixed cost of $50 per day. In the long run there is free entry into the market. Suppose the demand for milk doubles. If in the short run the number of firms is fixed and their fixed costs are sunk, what is the short run market supply function in terms of price? A) 40P if price is greater than $20 B) P/4 if price is greater than $20 C) 2.5P if price is greater than $20 D) 300-10P

Question

Quizplus · Accepted Answer

In the short run, firms produce where P = MC. Given MC = 4Q, solving for Q gives Q = P/4. Since the number of firms is fixed, the market supply is the sum of individual supplies. If demand doubles, the market supply function becomes 2.5P if price is greater than $20.

Suppose the Market Demand for Milk Is Qd =150-5P

Suppose the Market Demand for Milk Is Q^d =150-5P