compitive markets

[lovekesh]

Q. Suppose that there is an economy with two firms whose products are completely
independent. By “independent,” we mean that when one firm changes its price, the other
firm’s demand is totally unaffected. The only possibilities for employment in this
economy are a career running firm 1 or firm 2 or a career as an economics professor who
earns $20,000 a year. There are no barriers to entry in these careers, and anyone currently
employed in one occupation can costlessly change to another.
The only input that either firm needs to make its product is seaweed, which costs
$2 a pound. Each firm requires one pound of seaweed to produce one unit of its product.
The cost of the input (seaweed) does not include the cost of an entrepreneur’s time.
There are no costs involved in being an economics professor. The demand for the product
of firm 1 is P1 = 2,002 – 4Q1, and the demand for the product of firm 2 is P2 = 4,004 –
5Q2.
a) If anyone can become an economics professor, what will the long-run equilibrium
prices be for firm 1 and 2.

GUYS, PLZ TRY THIS QUESTION. What kind of question is that.

[anon_econ]

Umm how about we say that accounting profits in both firms will equal $20,000 in equilibrium?

[lovekesh]

yes vasudha.....but there are two firms with different demand functions. Why long run profits would be zero. I would consider if there were two types of industries instead of two types of firms. So, in long run, more n more entrepreneurs would join in and profits wld be no more than accounting profits.

[anon_econ]

I'm not really getting what u r saying :(
The equilibrium profit in either firm will be 20000 only if there's only 1 entrepreneur per firm..if there is more than one then profits need to be 20000*no of entrepreneurs :S

[lovekesh]

20000 profit only make sense to me when i treat firm 1 as a type of industry. For example, making soup out of seaweed and for firm 2 as making herbal medicines. These are two independent industries. If there's more profit in soup industry, more entrepreneurs would join in and would compete. So, firm 1 accounting profit would be reduced to 20000. Similarly for others in firm 2.

[anon_econ]

But lovekesh what do u mean by 'more entrepreneurs will join in and compete'? are they setting up a new firm or are they seeking employment in one of the two existing firms? if it's the latter then they'll have to share the profits with the existing entrepreneurs, right?
btw where have u got this question from?

[lovekesh]

I mean entrepreneurs means opening new business. So, they open more n more shops selling soups, compete with each other and in long run, their economic profits are zero. This question is from some university of navara.

[anon_econ]

"The only possibilities for employment in this
economy are a career running firm 1 or firm 2 or a career as an economics professor"
To me this sentence appears to convey that an entrepreneur does not have an option to create a new firm. I could be wrong. In fact i must be bcoz i'm not coming to any conclusion with my interpretation.

[lovekesh]

This is where i have doubt. If there are only TWO firms instead of many firms of two types, then i don't see any reason why those TWO firms won't behave as monopolist and earn profits over 20000. But if there are two types of many firms, then there is an opportunity for a long run equilibrium with economic profits to be zero. The answer you gave was correct. It's 20000 only. You just put 20000 as profits and solve for Q1 and Q2. Put Q1 and Q2 into demand curves and get P1 and P2.