The auto industry is currently composed of five identical firms. Each firm currently has one plant. It has cost:
TC= 20 + 15 Q + 1.25 Qsquared. (Q is output per year.) The long run costs for each firm involve a minimum average cost for each plant at $25 for 2 or more units per year. It takes 5 years to change plant size. (No plants are currently under construction.) Demand is P=45-Q. Initially there is competition and there are no barriers to entry or exit of firms in the widget industry. In this question what is important is the reasoning and steps to get your answer – not just an equation or graph.
A) Find the MC curve or equation.
B) Find the AVC (average variable cost) curve or equation.
C) Find the AC equation.
D) Find the short run supply curve (or equation) for a competitive firm.
E) Find the short run industry supply curve (or equation).
F) Find the short run: price, industry output, firm output, and firm profit.
G) Suppose that there is a recession and the demand curve suddenly shifts to P=37.5-Q. Please find the new short run: price, industry output, firm output, and firm profit.
H) The recession is now past and demand is back to P=45-Q. Find the long run supply curve (or equation).
I) What are the long run price(s) and quantity (ies)?
J) Suppose the industry as in E above becomes a monopoly. Find the long run equilibrium. What is the monopolist profit?
K) Which equilibrium is better (in a net benefit maximizing sense) long run compettion as in I or long run monopoly as in J. How much better?