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# Competitive Equilibrium

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There are ten firms in a competitive industry, each with MC= 40-12q + q2 .
Average cost is minimized at q=12 and Average Variable Cost is Minimized at q=9 for each firm. Demand for the product is given by P=160-Q, where Q represents industry output.

A. Explain why the industry is in long run competition equilibrium?
B. As a result of a new free trade policy, foreign sellers will soon be selling unlimited amounts at a price of 20. Analyze the short and long run effects on the domestic industry.
C. Who would oppose the new free trade policy? Who would favor it and why?

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#### Solution Preview

There are ten firms in a competitive industry, each with MC= 40-12q + q2 .
Average cost is minimized at q=12 and Average Variable Cost is Minimized at q=9 for each firm. Demand for the product is given by P=160-Q, where Q represents industry output.

A. Explain why the industry is in long run competition equilibrium

The long run competition equilibrium happened at the minimum average cost, where MC = AC.
At q=12, AC = MC= 40-12q + q2 = 40-12*12 + 12^2 = 40
Then the market price is set at 40, and market supply is Qs = 10q = 120
On the other hand, from the demand curve we find
Qd =160- P =160-40= 120
Thus, the market equilibrium is matched where Qd = Qs at price 40.

B. As a result of a new free trade policy, ...

#### Solution Summary

The solution answers the question(s) below.

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## Microecon

Problem 1
List the conditions than need to hold for a long run competitive equilibrium.

Problem 2
A number of stores offer film developing as a service to their costumers. Suppose that each store that offers this
service has a cost function C(q)=50+0.5q+0.08q2 .
(a) If the current rate for developing a roll of film is \$8.5, is the industry in long run equilibrium? Explain.
(b) If the firm is not in a long run equilibrium, find the price associated with long run equilibrium.
(c) Suppose now that a new technology is developed which will reduce the cost of film developing (total cost) by
%25. Assuming that the industry is in long run equilibrium, how much would any one store be willing to pay

Problem 3
You are given the following information about a particular industry:
200
722 ) (
1200
100 6500
2 q q C
p Q
p Q
s
D
+ =
=
- =
Where QD is the market demand, QS is the market supply and MC(q) is the firm total cost function.
Assuming that all firms are identical, and that the market is characterized by pure competition,
(a) Find the equilibrium price, the equilibrium quantity, the output supplied by each firm and the profit of the
firm in the short run.
(b) Would you expect to see entry into or exit from the industry in the long-run? Explain. What effect will entry
or exit have on market equilibrium?
(c) What is the lowest price at which each firm would sell its output in the long run? Is profit positive, negative
or zero at this price?

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