3. Perfect Competition

Consider a perfectly competitive market that faces the following market supply and demand functions

Q ^S = 4 + 9/8 p

Q ^D = 10 5/8 p

where identical firms face the total cost function of

T C = 1 + 2q + q ²

a) What is the market price?

b) Derive the average variable cost, average total cost, and marginal cost functions.

c) In the short run, how much does each firm produce?

d) In the short run, how much economic profit or loss will be obtained?

e) Based on the results in part (d), will firms want to enter or exit the market? Why?

f) In the long run, what is the market price? (Hint: set average cost to marginal cost to get the long run quantity first.)