A perfectly competitive industry is made up of identical, profit maximizing firms, each with a total cost (TC) function given by the following: (5 Part Question)

TC = 10 + 10q + q2

Where TC is measured in dollars ( $ ) and q is measured in units of output.

Its marginal cost function ( MC ) is thus given by the following:

MC = 10 + 2q

The market (industry) demand curve for this product is given by:

QD = 100 – P

This industry is currently in equilibrium at a market price of $20/unit.

At the market equilibrium, each firm is producing of output, and there are currently in the industry.

5 units; 32 firms

10 units; 16 firms

5 units; 16 firms

10 units; 32 firms

This industry is not in long run equilibrium, because each firm is earning economic profit, resulting in pressure.

Positive; entry

Positive; exit

Negative; entry

Negative; exit

Each firm is currently producing a level of output at which exist, because marginal cost is than average total cost.

Economies of scale; greater

Economies of scale; less

Diseconomies of scale; greater

Diseconomies of scale; less

Each firm’s ATC curve is U-shaped here because of the presence of costs and because marginal cost with output.

Fixed; falls

Fixed; rises

Variable; falls

Variable; rises

Assuming the number of firms does not affect any individual firm’s cost structure, which of the following will happen as this industry transitions to long run equilibrium?

I. The number of firms will rise

II. Individual firm output will rise

III. Each firm’s ATC level will rise

IV. The market price will rise

I only

I, II, and IV only

I and III only

I, III, and IV only