Suppose the demand function for widgets is Q(p) = 60 – p, and all firms that produce widgets have total cost function C(q) = 16 + q^3.a) Suppose that the market is perfectly competitive and there is free entry and exit. All firms that enter use the same technology. A firm that decides to stay out of the market can avoid paying the fixed cost and has a profit of zero. Solve for the long-run competitive equilibrium. What is the long-run equilibrium price? What is the quantity produced by each firm? How many firms will produce in this market?b) What is the consumer surplus under the perfectly competitive model?

Question
Asked Feb 13, 2019
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Suppose the demand function for widgets is Q(p) = 60 – p, and all firms that produce widgets have total cost function C(q) = 16 + q^3.

a) Suppose that the market is perfectly competitive and there is free entry and exit. All firms that enter use the same technology. A firm that decides to stay out of the market can avoid paying the fixed cost and has a profit of zero. Solve for the long-run competitive equilibrium. What is the long-run equilibrium price? What is the quantity produced by each firm? How many firms will produce in this market?

b) What is the consumer surplus under the perfectly competitive model?

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Expert Answer

Step 1

The given information:

 

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Step 2

Inverse demand function:

Inverse demand function can be calculated as follows:

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Step 3

a.)

Long run equilibrium:

Equate the average total cost and marginal cost to get the value of lon...

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