1. A perfectly competitive constant cost industry is populated with many firms, and potential entrants, who all have the (long-run) cost function LC(q) = 93 – 20q2 + 100q +

1. A perfectly competitive constant cost industry is populated with many firms, and
potential entrants, who all have the (long-run) cost function
LC(q) = 93 – 20q2 + 100q + 8,000.
a. is the minimum LR average cost of a firm? If the market price is equal to
this minimum average cost, what output will each firm supply?
b. Suppose the market demand curve is given by QD = 2500 – 3P, and the
industry is in long run equilibrium: P is equal to minimum LR average cost.
i. is total quantity demanded?
ii. If each firm is supplying the output from (a), how many firms must be
there in the market?
c. Suppose each firm in the industry currently has the following short run cost
function.
SC(q) = 50q2 – 1,500q + 20,000.
Assuming the number of firms is the same as in (b.ii), what is the industry’s
aggregate short run supply curve S (P), that gives the total quantity supplied at
an arbitrary price P?
d. Suppose the demand curve shifts to Q’D – 3000 – 3P.
i. will be the new price in the industry before the entry or exit of
firms? nt: equate short run supply to demand, and solve for P.
ii. How many firms will enter or exit the industry till it is in long run
equilibrium again? nt: you can answer this without answering (c), or
(d.i)

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