The graph below shows the long run average (total) cost curve for a perfectly co

Question

The graph below shows the long run average (total) cost curve for a perfectly competitive group of manufacturers of chainsaws. Use the graph below to answer the following questions. Note that manufacturing firms will only stay in this market if they can compete effectively (achieve productive efficiency) and that each firm only has one plant. At an average total cost of $8 (with nothing demanded at other prices), what would be the maximum and minimum number of manufacturing plants if demand was 600,000 units?

Explanation / Answer

The firms in the market will try to produce between 10000 to 30000 units to achieve minimum average cost. If they produce any other quantity their average cost will be higher and they will exit the industry in the long run.

If all the firms produce 10000 units, then the no. of firms = 600000/10000 = 60 firms

If all firms produced 30000 units, then the no. of firms = 60000/30000 = 20 firms

Thus, minimum no. of firms = 20 firms

Maximum no. of firms = 60 firms

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