There are currently 10 identical firms in the perfectly competitive gadget manufacturing industry. Each firm operates in the short run with a total fixed cost of F and total variable cost of 2Q2, where Q is the number of gadgets produced by each firm. The marginal cost for each firm is MC = 4Q. Each firm also has non sunk fixed costs of 128. Each firm would just break even (earn zero economic profit) if the market price were 40.
The market demand for gadgets is QM = 180 − 2.5P, where QM is the amount purchased in the entire market.
a) How large are the total fixed costs for each firm? Explain.
b) What would be the shutdown price for each firm? Explain.
c) Draw a graph of the short-run supply schedule for this firm. Label it clearly.
d) What is the equilibrium price when there are 10 firms currently in the market?
e) With the cost structure assumed for each firm in this problem, how many firms would be in the market at an equilibrium in which every firm's economic profits are zero?