Economic Quesion

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?