Question

Suppose that for each firm in the competitive market for potatoes, long-run average cost is minimized at $0.4 per pound when 250 pounds are grown. The demand for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then what would be the total consumer spending?

Answer 1

All the firms have identical cost condition, in such a constant cost industry, supply curve is horizontal. Firms earn zero economic profit in the long run due to free entry and exit of firms. As profit is zero price in the long run must be, P = minimum of LAC at equilibrium;

So, P = $0.4 ( at long run competitive equilibrium)

At this equilibrium price, demand, Q= 1000/P = 1000/0.4=25000( equilibrium quantity)

• So,total consumer's spending = P×Q=$0.4×25000 =10000

Each firms produce 250 at equilibrium, so no.of firms = 10000/250=40