Problem 3 Suppose that the market for bananas is characterized by perfect competition and bananas are a homogeneous good. The following is the market demand function for bananas: BD(P) = 800 – 2P where P is the price and Bp is the quantity of banana shipments demanded. A perfectly competitive firm, Cavendish Unlimited, is a supplier of bananas with the following cost function for supplying these shipments of bananas. C(B) = B2 + 200B +5,000 The rest of the firms in the industry are identical and (all combined) they supply ba- nanas according to the following supply function: Bs(P) = P/2 (a) Find firm's supply function (HINT: this is the profit-maximizing quantity supplied for any P). (b) What is the industry supply function? (c) Graph the industry supply function. Be sure to label any important points. (d) Graph the market demand for bananas in the same figure as your industry supply curve. (e) Find the equilibrium quantity and associated market price. Be sure to show your work. Label this equilibrium on your graph. (f) As a price-taker, a firm supplies bananas at the equilibrium price you found in the previous part. How many units will the firm, Cavendish Unlimited individually sup- ply at this price? What are it's total profits? (g) Should the firm continue to operate in this industry or should the firm exit? Explain.

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