Assume each firm in a perfectly competitive market has an identical cost structure such that long-run average cost is minimised at an output of 20 units (qi= 20). The mini-mum average cost is €10 per unit. Total market demand is given by
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a. What is the industry’s long-run supply schedule?
b. What is the long-run equilibrium price (P*)? The total industry output (Q*)? The output of each firm (q*)? The number of firms? The profits of each firm?
c. The short-run total cost function associated with each firm’s long-run equilibrium output is given by
Calculate the short-run average and marginal cost function. At what output level does short-run average cost reach a minimum?
d. Calculate the short-run supply function for each firm and the industry short-run supply function.
e. Suppose now that the market demand function shifts upward to Q= 2000 – 50P. Using this new demand curve, answer part (b) for the very short run when firms cannot change their outputs.
f. In the short run, use the industry short-run supply function to recalculate the answers to (b).
g. What is the new long-run equilibrium for the industry?