Suppose that a market has n = 100 identical firms and that the market is in a short-run competitive equilibrium.

Suppose that a market has n = 100 identical firms and that the market is in a short-run competitive equilibrium. All firms have the same total cost function TC(q) = q². The market price is P = 10. As the market moves from the short-run equilibrium to the long-run equilibrium,

a. the total market quantity of output decreases.

b. the number of firms increases.

c. the market price increases.

d. the demand curve shifts to the left.

Solutions

Expert Solution

Marginal cost=dTC/dQ=2Q

profit is maximised when MR=MC and in perfect competition P=MR

Thus 2Q=10. Quantity=5 and profit=5(10)-5²=25

Thus due to free entry and exit, new firms will enter due to positive profit

Ans is B

Rahul Sunny answered 2 years ago

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