Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

206 PRICE AND OUTPUT UNDER PERFECT COMPETITION [CHAP. 8
supply function:
QD ¼ QS
70,000 5000(4) ¼ 40,000 þ 2500(4)
70,000 20,000 ¼ 40,000 þ 10,000
50,000 ¼ 50,000 (equilibrium quantity 1)
(c)
Since all firms are identical and each produces 500 units of output (assumption 1) when the industry is in longrun
equilibrium, there will be 100 such firms in the industry.
When the market demand function changes to QD 0 , the new market equilibrium price and quantity are
obtained by
QD 0 ¼ QS
100,000 5000P ¼ 40,000 þ 2500P
60,000 ¼ 7,500P
P ¼ $8 (equilibrium price 2)
100,000 5000(8) ¼ 40,000 þ 2500(8)
60,000 ¼ 60,000 (equilibrium quantity 2)
In the short run, the number of firms in the industry is still 100 and each must still operate its optimum scale of
plant. However, each firm now produces and sells 600 units of output. Since at this output, SAC ¼ $4.50
(assumption 2), each firm is making $3.50 profit per unit and $2100 in total.
8.20 (a) With reference to Problem 8.19, if in the long run the market demand function remains at
QD 0 ¼ 100,000 2 5000P but the market supply function becomes QS 0 2 70,000 þ 2500P, (a) what
are the new long-run equilibrium price and quantity for this industry? (b) What type of industry is
this? What does this imply for factor prices? (c) Draw a figure (similar to Fig. 8-8 in the text)
showing the steps in parts (a) and (b) of Problem 8.19 and in part (a) of this problem.
(a)
The new long-run equilibrium price and quantity become
QD 0 ¼ QS 0
100,000 5000P ¼ 70,000 þ 2500P
30,000 ¼ 1,500P
P ¼ $4 (equilibrium price 3)
100,000 5000(4) ¼ 70,000 þ 2500(4)
80,000 ¼ 80,000 (equilibrium quantity 3)
(b)
Since this market equilibrium price is the same as equilibrium price 1 [see Problem 8.19(a)], the LS curve of
the industry is horizontal and the industry is a constant cost industry. This means that as the industry output
expands, either all factor prices remain unchanged or the increase in some factor prices are exactly balanced by
the reduction of others. If all factor prices remain unchanged, then the cost curves of each firm remain completely
unchanged (i.e., they will shift neither up nor down, nor sideways). Each firm will remain in exactly the
same position as in part (a) of Problem 8.19, but now we have 160 firms in the industry (each producing 500 of
the 80,000 units of the industry equilibrium output) rather than 100 firms as in part (b) of Problem 8.19.