Consider a competitive industry with free entry in which the cost functions for

Question

Consider a competitive industry with free entry in which the cost functions for each firm are: MC = 2.00 + 0.40qAC = 2.00 + 0.20q + 20/q where q is the firm's output.

Assume that the firm's fixed costs are unavoidable in the short run, but avoidable in the long run.

The LR equilibrium quantity supplied (q) by each firm is 10 and the LR equilibrium price is 6.

Suppose the inverse market demand curve by the product is given by p = 26 - 0.004Q, where Q is the market quantity. What is the market quantity? How many firms are in this industry?

Explanation / Answer

p = 26 - 0.004Q

put p = 6

Q = 5000

So No of firms = 5000/10 = 500

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