Consider a competitive constant-cost industry in which each firm's marginal and average costs are given by the formulas MC = 4q and AC = 2q + 50/q , where q represents the quantity supplied by the firm.
(i) Determine the quantity supplied by each firm in long-run equilibrium, and determine the firms' break-even price.
(ii) Suppose the market demand for the good produced by this industry is given by the formula P = 320 - 2Q, where P is the market price and Q is the market quantity. If the industry is in a long-run competitive equilibrium, what will be the market price and quantity, and how many firms will be in the industry?
(i) Solve the equation MC = AC to show that, in a long-run equilibrium, each firm produces 5 units and the break-even price is $20 per unit.
(ii) In long-run equilibrium, the market price will equal firms' break-even price of $20 per unit. Substitute P = 20 into the demand formula to show that the equilibrium market quantity is 150 units. Since each firm produces 5 units, there are 30 firms in the industry.
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