Question

Given that any company can enter the car washing industry with total cost curve TC= 10+4q, does it mean that the long run equilibrium price is 4?

Justify the above question by providing a sound reason.

Answer 1

TC = 10 + 4q

Price (p) = 4

For Equilibrium price

MC = MR

So, TC = 10 + 4q

MC = d(TC)/dq

= d(10 + 4q)/dq

= d (10)/dq + d (4q)/dq

= 0 + 4 = 4

Similarly

MR = d(TR)/dq

So,TR = Price x Quantity

= p x q

= 4 x q = 4q

Therefore. MR = d(TR)/dq

= d (4q)/dq = 4

Therefore. Equilibrium price at

MC = MR

= 4 = 4