A perfectly competitive constant-cost industry has a large number of potential e
ID: 1212394 • Letter: A
Question
A perfectly competitive constant-cost industry has a large number of potential entrants. Assume that each firm minimizes its LRAC at an output of 20 units and at an average cost of $10/unit. Market demand is given by QD = 1500 – 50P. a. (4 pts) Draw a graph of the LR demand and supply for the market, including the LR equilibrium price and quantity for the market. b. (2 pts) How many firms produce in the long run? c. (3 pts) What is the consumer surplus (numerical value) at the competitive equilibrium? Identify the CS in your graph from part (a). d. (3 pts) What is the producer surplus (numerical value) at the competitive equilibrium? Identify the PS in your graph from part (a).
Explanation / Answer
a) At perfect competition price is equal to AC as there is no profits in long run in perfect competition.
Equilibrium Price is 10 and equilibrium quantity is 1000
b) Per firm supply = 20
Total Demand = 1000
No of firms = 1000/20 = 50
c) The area of triangle in the above graph between Y axis, supply and demand curve. CS = 0.5*1000*(30-10) = 10000
d) The producer surplus is 0 here as 10 is the minimum price at which sellers will sell and it is equal to average cost also.
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