LONGER QUESTIONS ABOUT COMPETITIVE MARKETS QUESTION 1 An industry consists of only two types of firms. The number of these firms, their cost structures, and their capacities are shown in the table below. For each firm, average variable cost (AVC) is constant up to its capacity. Number of Capacity of AVC ($ per Fixed cost ATC at full firms firm's plant unit) per unit at capacity (units per full capacity ($/unit) year) ($/unit) Type 1 100 200 units 10 8 18 Type 2 50 100 units 20 6 26 a) Create a graph of the short-run market supply curve. b) Suppose that the market demand is D(P) = 34000 - 500P. What is the short-run equilibrium price in this market? How much are Type 1 firms producing? How much are Type 2 firms producing? c) Are Type 1 firms covering ATC? What about Type 2 firms? What would Type 2 firms do if they anticipate that demand would not change? d) Now suppose that potential entrants to this market have the same cost structures and capacities as the Type 1 firms. Suppose further that total capital expenditure required for entry is 10000 and the required rate of return is 8%, which corresponds to an annual capital charge of 10000*0.08 = 800. Given this what is per-unit capital charge? What is the entry price? e) Assuming that long-run demand is D(P) = 34000 - 500P find the long-run equilibrium price in this market. How many additional Type 1 firms will enter this market in the long- run