Question: Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C = 50 + 4Q + 2Q2. The associated marginal cost is MC = 4+4Q and the point of minimum average cost is Qmin = 5.
(a) Determine the firm’s profit-maximizing level of output. Compute its profit.
(b) The industry demand curve is Q = 200 – 5P. What is the total market demand at the current $16 price? If all firms in the industry have cost structures identical to that of firm Z, how many firms will supply the market?
(c) The outcomes in part a and b cannot persist in the long run. Explain why. Find the market’s price, total output, number of firms, and output per firm in the long run.
(d) Comparing the short-run and long-run results, explain the changes in the price and in the number of firms.