A perfectly competitive painted necktie industry has a large number of potential entrants. Each firm has an identical cost structure such that long-run average cost is minimized at an output of 20 units (qi = 20). The minimum average cost is $10 per unit. Total market demand is given by Q = 1,500 – 50P
(a) What is the industry's long-run supply schedule?
(b) What is the long-run equilibrium price (P*)? The total industry output (Q*)? The output of each firm (qi*)? The number of firms? The profits of each firm?
(c) The short-run total cost curve associated with each firms long-run equilibrium output is given by STC = 0.5q2 – 10q + 200 where SMC = q – 10. Calculate the short-run average and marginal cost curves. At what necktie output level does short-run average cost reach a minimum?
(d) Calculate the short-run supply curve for each firm and the industry short-run supply curve.
(e) Suppose now painted neckties become more fashionable and the market demand function shifts upward to Q = 2,000 – 50P. Using this new demand curve, answer part (b) for the very short-run when firms cannot change their outputs.
(f) In the short run, use the industry short-run supply curve to recalculate the answers to part (b).
(g) What is the new long-run equilibrium for the industry?