Answer to Question #108178 in Economics of Enterprise for Michael

Question

The short-run total cost function of a firm that employs labour (L) and fixed capital is given by c = vKo + wq^1/B × Ko^ -a/B Where w is the cost of the labour and v is the cost of capital (I) Derived the marginal cost of the firm ii. Assuming that the firm is a price taking one that sells its output at p per unit, derive the short-run supply function of the firm iii. If there are 200 firms in the industry with similar cost conditions, compute the total market supply.

Answer 1

(I) The marginal cost of the firm is:

MC = C'(q) = w×1/B×q^(1/B - 1)×Ko^(-a/B).

ii. Assuming that the firm is a price taking one that sells its output at p per unit, the short-run supply function of the firm is the part of its MC curve above the intersection with AVC curve.

iii. If there are 200 firms in the industry with similar cost conditions, then the total market supply is derived simply by adding the quantities supplied by all 200 firms.