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Suppose there is a perfectly competitive industry where all the firms are identical with identical cost curves. Furthermore, suppose that a representative firm’s (short run) total cost is given by the equation TC = 100 + q^2+ 2q where q is the quantity of output produced by the firm. You also know that the market demand for this product is given by the equation P = 1000 – 2Q where Q is the market quantity. The SRMC is given by SRMC=2q+2. Suppose there are initially 50 firms in this market.. a. What is the equilibrium quantity and price in this market given this information? b. The firm’s MC equation based upon its TC equation is SRMC = 2q + 2. Given this information and your answer in part (a), what is the firm’s profit maximizing level of production, total revenue, total cost and profit at this market equilibrium? Is this a short-run or long-run equilibrium? Explain your answer. c. Is this firm experiencing economies of scale, diseconomies of scale, or constant economies of scale in the short run? d. Given your answer in part b, what do you anticipate will happen in this market in the long-run? e. In this market, what is the long-run equilibrium price and what is the long-run equilibrium quantity for a representative firm to produce? (Assume that the minimum of SRATC is also the minimum of LRATC and that this industry is a constant cost industry. Assume, additionally, that the firm will choose the same plant size as it had chosen previously.) Explain your answer.
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