Question

# 10.   The widget industry is perfectly competitive. The lowest point on the long-run average cost curve...

10.   The widget industry is perfectly competitive. The lowest point on the long-run average cost curve of each of the identical widget producers is K4, and this minimum point occurs at an output of 1,000 widgets per month. When the optimal scale of a firm’s plant is operated to produce 1, 150 widgets per month, the short run   average cost of each firm is K5. The market demand curve for widgets Is.

QD   = 150, 000 – 5,000 P
Where P is the price per unit of a widget and QD is the quantity demanded of widgets per month. The market supply curve for widgets is.
QS = 80,000 + 5,000 P
Where QS is quantity of widgets supplied per month.

a)What is the equilibrium price and output in the short run for both industry and each firm?

b)How many firms are in this industry when it is in long run equilibrium?

c)Are firms making profits or losses? (Assume that the number of firms in the industry equals the number that would exist in long -run equilibrium)

We have given QD = 150, 000 – 5,000 P and QS = 80,000 + 5,000 P
So, the equilibrium Price would be,
150,000 – 5,000P = 80,000 + 5,000P,
150,000-80,000-5,000P = 5000P,
70,000 = 5,000P+5,000P (5,000P+5,000P = 70,000 )
10,000P =70,000.
P = 70,000/10,000
P= 7.

Now, the Equilibrium Quantity would be,
We know the Equilibrium P = 7
So, QS = 80,000 + 5,000 * 7,
QS = 80,000 + 35,000,
QS = 115,000.

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