Questions
Perfectly competitive, constant-cost industry has a market demand curve P =50 - (1/7)Q.
Each firm has a U-shaped long-run average cost function with a minimum of $10. The efficient scale of production for these firms is 5 units.
a) What is the long-run equilibrium market price and quantity?
b) What is the long-run number of firms in the industry? How much does each produce? What are their profits?
c) Suppose that market demand drops so that the new demand curve is P =40 - (1/7)Q. If the short-run marginal cost of firms is SMC= 2q - 5, what is the short-run equilibrium price and quantity in the market? What is the output of each firm in the short run?
d) Now find the new long-run equilibrium price and quantity. What is the new equilibrium number of firms?