Recently, the spot market price of U.S. hot rolled steel plummeted to $400 per ton. Just one year ago, this same ton of steel cost $700. According to Metals Monitor, the drop in price was due to falling oil prices, along with a rise in cheap imports and excess capacity. These dramatic market changes have greatly impacted the supply of raw steel. Suppose that last year the supply for raw steel was QS raw = 600 + 4P, but this year it has shifted to QS raw = 4,200 + 4P. Assuming the market for raw steel is competitive and that the current worldwide demand for steel is Qd raw = 9,000 – 8P, compute the equilibrium price and quantity for the steel market one year ago, and the equilibrium price-quantity combination for the current steel market. Suppose the cost function of a representative steel producer is C(Q) = 1,200 + 15Q2. Compare the change in the quantity of raw steel exchanged at the market level with the change in raw steel produced by a representative firm. How do you explain this difference?
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