Question: (20%)

We believe that the market for shoes is perfectly competitive with the inverse demand function p = 200- 0.5Q. Each firm producing shoes has an upward sloping marginal cost curve mc = 5q, a U-shaped AVC curve and zero fixed costs. The AVC curve crosses the MC curve at q = 4 for all firms except for 30 oldest firms which are more efficient end for them the intersection point is at q = 3. Call them "old" firms, while others are "young".

1. (5%) Explain what conditions must be satisfied in order for this market to be perfectly competitive.
2. (5%) Calculate the equilibrium output, price and the number of old and young firms if the market is in the long-run equilibrium.
3. (5%) Economists predict that as a result of a global financial crisis consumers' disposable income will fall considerably in the upcoming year and they could not afford purchasing as many shoes as they used to buy previously. If the demand function is expected to fall to p =180-0.5Q, calculate the short-run effect of the financial crisis on shoe industry. (Correct numerical &newer will give you a full credit, diagram will give you a partial credit)
4. (5%) Calculate the long-run effort of the financial crisis on this industry.

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