Question

Questions #46 - #50 refer to the problem below:

A perfectly competitive industry is made up of identical, profit maximizing firms, each with a total cost (TC) function given by the following:

TC = 10 + 10q + q²

Where TC is measured in dollars ( $ ) and q is measured in units of output.

Its marginal cost function ( MC ) is thus given by the following:

MC = 10 + 2q

The market (industry) demand curve for this product is given by:

Q^D = 200 – P

This industry is currently in equilibrium at a market price of $20/unit.

46 - At the market equilibrium, each firm is producing ___________ of output, and there are currently __________ in the industry.

47- This industry is not in long run equilibrium, because each firm is earning _________ economic profit, resulting in __________ pressure.

48- Each firm is currently producing a level of output at which ATC = ________ , AVC = ________, and MC = _________ .

49- Each firm is currently producing a level of output at which ___________ exist and for which the marginal product of labor is __________.

50-

Assuming the number of firms does not affect any individual firm’s cost structure, which of the following will happen as this industry transitions to long run equilibrium?

I. The market equilibrium quantity will rise

II. Individual firm output will fall

III. Each firm’s ATC level will fall

IV. The market price will rise

Answer 1

46 - At the market equilibrium, each firm is producing 5 units of output, and there are currently 36 firms in the industry.

Explanation:

The industry output is:

QD = 200 - P = 200 - 20 = 180 units

Individual firm's produces at the point where,

MC = P

10 + 2q = 20

2q = 20 - 10 = 10

q = 10 / 2 = 5

Number of firms in the industry = 180 / 5 = 36

So, individual firm produces 5 units and there are 36 firms in the industry.

47- This industry is not in long run equilibrium, because each firm is earning positive economic profit, resulting in entry pressure.

Explanation:

Individual firm's, TR = P * q = $20 * 5 = $100

TC = 10 + 10q + q² = 10 + 10(5) + 5² = $85

Profit = TR - TC = 100 - 85 = $15

48- Each firm is currently producing a level of output at which ATC = $17 , AVC = $15, and MC = $20 .

Explanation:

ATC = TC / q = 85 / 5 = $17

AVC = VC / q = (10q + q²) / q = 10 + q = 10 + 5 = $15

MC = 10 + 2q = 10 + 2(5) = $20

49- Each firm is currently producing a level of output at which diseconomies of scale exist and for which the marginal product of labor is decreasing.

50. Ans:

I. The market equilibrium quantity will rise

II. Individual firm output will fall