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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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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, ...

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