1. EC202: Worked Example #3.6 Frank Cowell April 2005
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2. WX3.6: part 1

3. For Q below this get IRTS and vice versa
WX3.6: part 1
Total cost:
Marginal cost:
Average cost:
MC intersects AC at:
For Q below this get IRTS and vice versa
This is where:

4. WX3.6: part 2 Price at Q is: Price P separates regimes:
Identical this portion of MC
Price P separates regimes:
Exactly two values here
Cheaper to close down here

5. WX3.6: part 2  AC MC P Demand: high a Supply (one firm) Demand: low aQi P 1 2 3 4 5 6 7 8 9 10
0.5
1.5 AC
Demand: high a
Supply (one firm)  MC
Demand: low a

6. WX3.6: part 3 Two such firms: extra point half-way between green blobs
Four such firms: points at quarter, half, three-quarter positions between blobs.
Infinity of these firms: all points between blobs

7. WX3.6: part 4

8. WX3.6: part 4
High demand: unique equilibrium on upper part of supply curve
Very low demand: equilibrium with zero output.
In between: no equilibrium for a single firm?

9. WX3.6: part 4 If there is equilibrium Supply=Demand gives us
Using definition of P:
This is only valid if P > P:
This yields the condition:

10. WX3.6: part 5 Equilibrium condition Supply=Demand now gives us
Outcome depends on which of three regimes applies to demand, high, medium or low

11. WX3.6: part 5 High demand Medium demand. Average output per firm is
Achieve this by putting a proportion q at Q and 1–q at 0 where
Low demand.
Output per firm is 0