Summary 313c. Determine the long-run, zero-profit equilibrium. How many firms will
serve the market?- Firm Z, operating in a perfectly competitive market, can sell as much or
as little as it wants of a good at a price of $16 per unit. Its cost function is
C 50 4Q 2Q^2. The associated marginal cost is MC 4 4Q and
the point of minimum average cost is Qmin5.
a. Determine the firm’s profit-maximizing level of output. Compute its
profit.
b. The industry demand curve is Q 200 5P. What is the total market
demand at the current $16 price? If all firms in the industry have cost
structures identical to that of firm Z, how many firms will supply the
market?
c. The outcomes in part (a) and (b) cannot persist in the long run.
Explain why. Find the market’s price, total output, number of firms,
and output per firm in the long run.
d. Comparing the short-run and long-run results, explain the changes in
the price and in the number of firms. - Demand for microprocessors is given by P 35 5Q, where Q is the
quantity of microchips (in millions). The typical firm’s total cost of
producing a chip is Ci5qi, where qiis the output of firm i.
a. Under perfect competition, what are the equilibrium price and
quantity?
b. Does the typical microchip firm display increasing, constant, or
decreasing returns to scale? What would you expect about the real
microchip industry? In general, what must be true about the
underlying technology of production for competition to be viable?
c. Under perfect competition, find total industry profit and consumer
surplus. - In 2007, dairy farmers faced an (equilibrium) wholesale price for
their milk of about 1 cent per ounce. Because of changes in consumer
preferences, the demand for milk has been declining steadily since
then.
a. In the short run, what effect would this have on the price of milk? On
the number of dairy farmers (and the size of dairy herds)? Explain.
b. What long-term prediction would you make for the price of milk? - In a competitive market, the industry demand and supply curves are P
70 QDand P 40 2QS, respectively.
a. Find the market’s equilibrium price and output.
b. Suppose that the government provides a subsidy to producers of $15
per unit of the good. Since the subsidy reduces each supplier’s
marginal cost by 15, the new supply curve is P 25 2QS. Find the
market’s new equilibrium price and output. Provide an explanation
for the change in price and quantity.
c07PerfectCompetition.qxd 9/29/11 1:30 PM Page 313