A perfectly competitive painted necktie industry has a large number of potential entrants. Each firm has an identical cost structure such that long-run average cost is minimized at an output of 20 units (qi = 20). The minimum average cost is $10 per unit. Total market demand is given by
Q = 1,500 – 50P
a. What is the industry’s long-run supply schedule?
b. What is the long-run equilibrium price (P*)? The total industry output (Q*)? The output of each firm (q*i)? The number of firms? The profits of each firm?
c. The short-run total cost curve associated with each firm’s long-run equilibrium output is given by
STC = .5q2 – 10q + 200
Where SMC = q – 10. Calculate the short-run average and marginal cost curves. At what necktie output level does short-run average cost reach a minimum?
d. Calculate the short-run supply curve for each firm and the industry short-run supply curve.
e. Suppose now painted neckties become more fashionable and the market demand function shifts upward to Q = 2,000 – 50P.Using this new demand curve, answer part b for the very short run when firms cannot change their outputs.
f. In the short run, use the industry short-run supply curve to recalculate the answers to part b.
g. What is the new long-run equilibrium for the industry?