Suppose that the demand for stilts is given by Q 5 D 1P2 5 1,500 2 50P and that the long-run total operating costs of each stiltmaking firm in a competitive industry are given by C1q2 5 0.5q2 2 10q.

Entrepreneurial talent for stilt making is scarce. The supply curve for entrepreneurs is given by QS 5 0.25w, where w is the annual wage paid.

Suppose also that each stilt-making firm requires one (and only one) entrepreneur (hence the quantity of entrepreneurs hired is equal to the number of firms). Long-run total costs for each firm are then given by C1q, w2 5 0.5q2 2 10q 1 w.

a. What is the long-run equilibrium quantity of stilts produced? How many stilts are produced by each firm?

What is the long-run equilibrium price of stilts? How many firms will there be? How many entrepreneurs will be hired, and what is their wage?

b. Suppose that the demand for stilts shifts outward to Q 5 D 1P2 5 2,428 2 50P.

How would you now answer the questions posed in part (a)?

c. Because stilt-making entrepreneurs are the cause of the upward-sloping long-run supply curve in this problem, they will receive all rents generated as industry output expands. Calculate the increase in rents between parts

(a) and (b). Show that this value is identical to the change in long-run producer surplus as measured along the stilt supply curve.