Suppose market demand is Q = 1000 – 4p. If all firms have LRAC = 50 –

Suppose market demand is Q = 1000 – 4p. If all firms have LRAC = 50 – 5q + q2, how many identical firms will there be when this industry is in long-run equilibrium?

What will be an ideal response?

ANSWER

The long-run market supply curve is horizontal at the minimum LRAC. LRAC is minimized when -5 + 2q = 0 or q = 2.5. At this level of output, LRMC = LRAC = 43.75. At this price, 825 units are demanded. If each firm produces 2.5 units in the long run, then 330 firms will be in this market.