2. (40%) Consider a competitive market of alcohol in which the capacity of each firm is 20 units. a That is, the maximum

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2 40 Consider A Competitive Market Of Alcohol In Which The Capacity Of Each Firm Is 20 Units A That Is The Maximum 1 (114.02 KiB) Viewed 17 times

2. (40%) Consider a competitive market of alcohol in which the capacity of each firm is 20 units. a That is, the maximum quantity that each firm can supply is 20 units per day. The total cost function of each firm is TC = 5y, where y is the quantity supplied by a firm. The market demand is D(p) = y 1220 - 20p, where D is the market total demand. (A) (10%) What is the equilibrium market price? At this price, what is the equilibrium quantity, D? How many firms will be in the market in equilibrium? (B) (10%) Following part (A), the government now stops issuing new license to alcohol sellers. This means the number of firms in the market will be fixed at the that in part (A), and no more firms can enter this market. The cost function remains the same, and each firm can still only supply 20 units at most. If the market demand becomes D(p) = 1120 – 20p, what is the market price in this case? (Note: the market is not perfectly competitive since entry is not free). (C) (5%) Following part (B), what is the profit of each firm per day? (D) (5%) Following part (B) and (C), if the license can be rented, what is the maximal rent can be charged per day? (E) (10%) Following part (B) - (D): with the new demand in part (B), if the government would like to make the market price to be 5, how many new license should be issued?