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1. Assume a perfectly competitive constant cost industry, currently in long-run equilibrium. Market

demand in the industry is given by Q = 1500 - 25P. The short-run market supply curve is given by:
Q = 15P - 100 for P B 10
= 0 for P < 10
There are 25 firms in the industry.
(a) Calculate the equilibrium market price and quantity and the amount produced by each firm.
(b) Each firm is currently operating at the optimal plant size. What must be the minimum short-run average
variable costs for the firm and the efficient average cost? Explain

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1 answer

  1. First, I don't know what you mean by "for P B 10" or "=0 for P<10"

    That said, equilibrium will occur when Qd=Qs. You have the equations, simply solve for Q and then P. Hint: I get Q=500, P=40. Since there are 25 firms, Qi=500/25 = 20

    b) since each firm is at it's optimal plant size, and the P and Q are at their long-run equilibriums, the firm must be operating where AVC=P.

    Take a shot, explain why this must be so.

    I hope this helps

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