Suppose that the market demand for a product is given by QD 5 D 1P2 5 A 2 BP. Suppose also that the typical firm’s cost function is given by C1q2 5 k 1 aq 1 bq2

.

a. Compute the long-run equilibrium output and price for the typical firm in this market.

b. Calculate the equilibrium number of firms in this market as a function of all the parameters in this problem.

c. Describe how changes in the demand parameters A and B affect the equilibrium number of firms in this market.

Explain your results intuitively.

d. Describe how the parameters of the typical firm’s cost function affect the long-run equilibrium number of firms in this example. Explain your results intuitively.

Analytical Problems