Question

1.     In 2012, the box industry was perfectly competitive. The lowest point on the long-run average cost curve of each of the identical box producers was $4, and this minimum point occurred at an output of 1,000 boxes per month. The market demand curve for boxes was                                                                                                     2 marks

where P was the price of a box (in dollars per box) and Q_D was the quantity of boxes demanded per month. The market supply curve for boxes was

Where Q_S was the quantity of boxes supplied per month.

a.      What was the equilibrium price of a box? Is this the long-run equilibrium price?

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

Answer 1

At equilibrium:

$140000-10000P=80000+5000P \\ 15000P=140000-80000 \\ 15000P=60000 \\ P=\frac{60000}{15000}=4 \\ Q=140000-10000P \\ =140000-10000 \times 4 \\ =140000-40000 \\ =100000$

Minimum output per month = 1000

So no of firm $=\frac{100000}{1000}=100$

Answers:

a. Equilibrium Price = 4

b. Number of firms = 100