MBA603
HOMEWORK 3
Instructor: Stephen Layson
Spring 2004
There are 100 identical firms in a competitive copper industry. Each firm produces an
identical product and each has a marginal cost curve given by MC  200  .04q , where q
is firm copper production measured in ounces per month. Each firm has a U shaped
average total cost curve with minimum average total cost of $240 at q=1000. The
equation for average total cost (ATC) is given by ATC 
20,000
 200  .02q .
q
For 100 copper firms, the industry supply curve is given by P  200  .0004Q , where Q
is industry output measured in ounces per month.
(a) Suppose the market demand for this copper is P  740  .005Q . Solve for the
equilibrium price and output in the copper market. Illustrate with supply and demand
diagrams.
(b) How much economic profit will each firm earn at the equilibrium price found in part
(a)? Illustrate using a diagram with average total cost and marginal cost.
(c) Suppose world income growth causes the demand for copper to increase to
P  1550  .005Q . How will this affect the equilibrium price and output in the world
gold market? Illustrate with a diagram. Assume that input prices paid by copper
producers remain constant.
(d) At the new equilibrium price of copper found in part (c), determine each firm’s profit
and output. Assume that there are still only 100 firms in the industry.
(e) In the long-run how will this industry adjust to the increase in demand? Assume the
demand remains at the level given in part (c) and that there exist many potential
entrants with cost functions that are identical to the original 100 incumbent firms in
the copper industry. In the long-run what will be the equilibrium price of copper? In
this long-run equilibrium calculate each firm’s profit. How many firms will be in this
industry in the long-run equilibrium? Explain.
(f) How would your answers in part (e) change if input prices rise with the industry level
of production? Explain. How would your answer in part (e) change if the 100 original
copper producers had lower average total costs of production than the potential
entrants? Explain.