In an energy efficient world riding bicycles is becoming more and more popular, resulting in a large number of customers. However, customers are generally indifferent between brands and believe that all bicycles are the same making the market perfectly competitive. Unfortunately, making bicycle frames requires special skills so the supply of workers in this industry is upward-sloping, and the wages earned by frame maker?s increase as the industry output increases.

Firms in this market face the following total cost:

Where Q is the number of frame makers and W is the daily wage paid to workers. The wage, which depends on total industry output, equals W = 0.1NQ, where N is the number of firms. Market demand is:

(a) How does average total cost for the firm change as industry output in-creases and what does this imply for industry's long-run supply curve?

(b) Calculate the long-run equilibrium output for each firm.

(c) Explain how the long-run equilibrium price changes as the number of firms increases?

(d) Calculate the long-run equilibrium number of firms and total industry output.

(e) Calculate the long-run equilibrium price.

(f) If the demand changed to Q ^D = 1,000 - 10P what would be the new long-run competitive equilibrium and does this support your prediction about the long-run supply curve from part (a)?

TC=Q-8Q + 20Q + W QD=500-20P