Office Building Maintenance Plans

Misti James Assignment 2: Office Building Maintenance Plans ECO 550: Managerial Economics and Globalization Dr. Grace Onodipe November 6, 2011

Office Building Maintenance Plans

Part A: A: Algebraically determine the market equilibrium price/output combination. Qs = 2P 20 Qd = 80 2P (Supply) (Demand)

To justify the equilibrium price, Qs is set equal to Qd and then P is solved for. When P is solved for, that will be the price when both equations are at equilibrium. Qs = Qd 2P 20 = 80 2P 2P + 2P = 80 + 20 4P = 100 P = 100/4 P = 25. Therefore, when P = 25, Qp and Qd will be the same. B: Use a graph to confirm your answer. Graphically depicted, it will look as follows:

Office Building Maintenance Plans

25

Office Building Maintenance Plans Part B:

A. Find the price which the firm will go out of business. The shutdown point in a perfectly competitive market is where the market price falls below the average variable cost. For the graph above, the shutdown point will be at P2 and Quantity 8 (point b). Anything below this point will result in the firms negative economic profit. B. What is the firms long run supply curve? In the short run, the firm will see positive economic profit when P is greater than the AVT. However, when this happens, new firms will enter the market and force the price back down to

Office Building Maintenance Plans

the equilibrium level, when AFC is equal to Quantity. In the figure above, the price P3 represents the price at which the firm is at equilibrium and equal to Quantity 10. Price P4 indicates that quantity has risen to 11, however this can only be enjoyed as positive economic gain until another firm enters the perfectly competitive market. Below, the graph indicates that the horizontal line extending from P3 is the long run supply curve.

Long Run Supply Curve