In: Economics
The cheese business in Lake Fon-du-lac, Wisconsin, is a competitive industry. All cheese manufacturers have the cost function C = Q2 + 16, while demand for cheese in the town is given by Qd = 120 - P. The long-run equilibrium numbe of firms in this industry is:
a. 14
b. 28
c. 22
d. 120
e. 29
To find a long run competitive equilibrium in a constant cost industry we need to
LAC(Q) = Q + 16/Q , This is minimized when its derivative is 0, 1 - 16/q^2 = 0 or Q = 4 Hence output = 4
The min of LAC = LAC(4) = 8 Thus the long run equilibrium price is 8
Aggregate demand at the price 8 is 120-p=120-8 = 112, so the number of firms is 112/4 = 28 ANSWER (B).