Suppose the candle manufacturing industry is organized as a perfectly competitiv

Question

Suppose the candle manufacturing industry is organized as a perfectly competitive market i.e. it consists of many firms with identical cost structures. A single firm's long-run average total cost function is “U” shaped and minimized at an output of q = 8 units.

At q = 8 units of output, the long-run average total cost is $100. (These are heavenly candles!!!)

The candle industry is a "constant cost" perfectly competitive industry. That is to say, there are no EXTERNAL economies or diseconomies present in the market.

The market demand for candles is given by: QD = 2,600 – 2P.

Determine the following:

a. long-run equilibrium output of each firm, q*

b. long-run equilibrium price of candles, P*

Explanation / Answer

In the long-run the firm has only break-even output. Such output is possible if the average cost (AC) is the minimum. At q = 8 units, AC is $100 and the minimum.

a.

Therefore, the long-run equilibrium output is 8 units.

b.

Since the minimum AC = P, the equilibrium price is $100.

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