Kites are manufactured by identical firms. Each firm’s long-run average and marginal costs of production are given by:
AC = Q + 100/Q and MC = 2Q
where Q is the number of kites produced.
a. In long-run equilibrium, how many kites will each firm produce? Describe the long-run supply curve for kites.
b. Suppose that the demand for kites is given by the formula:
Q = 8,000 − 50P
where Q is the quantity demanded and P is the price. How many kites will be sold? How many firms will there be in the kite industry?
c. Suppose that the demand for kites unexpectedly goes up to:
Q = 9,000 − 50P
In the short run, it is impossible to manufacture any more kites than those already in existence. What will the price of kites be? How much profit will each kite-maker earn?
d. In the long run, what will the price of kites be? How many new firms will enter the kite-making industry? How much profit will they earn?