Assume that in a different competitive industry, there are 8 firms, each with a
ID: 1254085 • Letter: A
Question
Assume that in a different competitive industry, there are 8 firms, each with a marginal
cost equal to
MC = 20-10q +q^2
Average cost is minimized at q = 10 and AVC is minimized at q = 8 for each of these
firms. Demand for the product is P = 100-QD
a. Is this industry in long-run competitive equilibrium? Explain your answer.
b. A new trade policy will open this industry to foreign competition for the first time.
The world price is $10 (i.e., there is an unlimited quantity available to consumers at
$10 each). What will be the effect on the number of domestic firms operating in the
short run? In the long run?
Explanation / Answer
In this case, MC is equal to a firms supply and given that we have 8 firms our market supply is 8*MC MC=160-80Q-8Q^2 If we set MC and P equal to each other this is the same as setting supply and demand euqal to each other and then we solve for Q. This tells us equilibrium and we can then solve for P. 160-80Q-8Q^2=100-Q 60=79Q+8Q^2 60=Q(79+8Q) 60/(79+8Q)=Q 60/79+15/2Q=Q 60/79+15/2=Q^2 sqrt(60/79+15/2)=Q This answer is close to 3. This means they are producing too much currently. For part B if they were to sell globally, they would increase their demand however,since there is an unlimited quantity the supply is in abundance shifting the supply curve to the right. This is going to lower the price in the short run as new firms enter the market. In the long run, firms will fave below the AVC line and be forced to shut down therefore leaving the market. This will raise the price back up to equilibrium.