Consider an industry in an urban area that is subject to localization economies. The industry faces the demand curve P ¼ 59  0:05Q;

WherePispriceandQistheoutputoftheindustry.Eachfirmintheindustryhasanaverage cost function of ac ¼ 10  0:001Q:

The firms in the industry behave as competitive firms.

a. What is the average cost function of the industry?

b. What is the marginal cost function of the industry? (Hint: First find the total cost function.)

c. What is the output level that this competitive industry would produce in the absence of any bribes or subsidies? What is the difference between average cost and marginal cost at this output level?

d. What output level would be produced if there were no localization economy for the industry? (Hint: The coefficient of Q in the average cost function is zero.)