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    Supply and Demand

    Office building maintenance plans call for the stripping, waxing, and buffing of ceramic floor tiles. This work is contracted out to maintenance firms, and both technology and labor requirements are very basic. Supply and demand conditions in this perfectly competitive service market in New York are:

    QS = -20 + 2P(Supply)
    QD = 80 – 2P(Demand)

    where Q is thousands of hours of floor reconditioning per month, and P is the price per hour.

    A.Algebraically determine the market equilibrium price/output combination.
    BUse a graph to confirm your answer
    1. Find the price below which the firm will go out of business.If the price is below 30then firm will go out of business.
    2. What is the firm’s long run supply curve?

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    SAMPLE ANSWER:

    In the long run, with free entry and exit, how many individual firm supply curves do we add up? if the price is below min(ATC), then the quantity supplied is zero. Any firms that are in the industry would exit if the price stayed that low. If we have P = min(ATC), then firms are indifferent between: (i) staying out of the  market and (ii) entering, and producing the quantity at which P = min(ATC). Thus, any and all quantities are on the market supply curve at that price. If we have P > min(ATC), then entry by new firms is profitable

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