We\'ll use \"thousand cubic feet\" (tcf) as the quantity unit (just deal with q

Question

We'll use "thousand cubic feet" (tcf) as the quantity unit (just deal with q or Q in the equations as given, since all prices and costs are defined in those terms). Costs and demand are on a per-day basis. Right now, it's a competitive national market with identical firms. Producers pay fixed costs of $10,000 for infrastructure and management. Marginal costs start at $1.60 but increase by $2 for every million tcf. Economists have estimated national market inverse demand to be P(Q) = $9 - $2 / 1,000,000 Q. Find and plot a firm's long run supply curve. Find the equilibrium number of firms. Find (short run, i.e. no entry/exit) market supply. Plot market supply and demand.

Explanation / Answer

a.i. Since, MC=$2

TC=$2Q and AC=$2

Hence, long run supply curve is 2Q

ii. At long-run equilibrium P=AC

So, 9-2Q/1,000,000=2

or, Q=35,000,00

iii. Short run requilibrium requires P=MC

Since MC is 1.6 thus, short run market supply is 1.6Q

iv. In the long run Q=3500000

So P=9-7=2

Thus, if we draw price and quantity along the vertical and horizontal axes then, intersection of demand and spply will give equilibrium value of price, quantity, i.e. $2 and 3500000units respectively.

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