a. A firm has a fixed cost of $900 and a marginal cost of $20 per unit. Write out the equation for its total cost (TC) curve and average total cost (ATC) curve, with Q being its output level. What happens to average cost as Q gets bigger? If all firms have similar costs, why would this industry be more likely to be dominated by one or only a few firms?

b. To get competition where there are many firms in the market, something has to cause each firm’s average cost to rise as it produces more. The following illustrates how rising marginal cost can do this. Suppose a firm has a fixed cost of $900 and the following marginal cost curve: MC = Q2 (so at Q=1, the MC is $1, at Q=2, the MC is $4, and so on). Write the TC and the ATC functions for this firm. Solve for Q where average cost is smallest.

If all firms have the same cost, this will be the average size of the firm when there are enough firms to make an industry competitive.