Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C = 50 + 4Q + 2Q2. The associated marginal cost is MC = 4 + 4Q and the point of minimum average cost is Qmin = 5.
a. Determine the firm’s profit-maximizing level of output. Compute its profit.
b. The industry demand curve is Q = 200 - 5P. What is the total market demand at the current $16 price? If all firms in the industry have cost structures identical to that of firm Z, how many firms will supply the market?
c. The outcomes in part (a) and (b) cannot persist in the long run.
Explain why. Find the market’s price, total output, number of firms, and output per firm in the long run.
d. Comparing the short-run and long-run results, explain the changes in the price and in the number of firms.