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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