Schure tests06ans

# Rm now o ff ers q i 22 btw d 6 marks in the long run

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rm now o ff ers q i = 22 BTW] (d) (6 marks) In the long run fi rms can enter or exit the market. In this case fi rms enter entry because they are pro fi table in the SR with P = 18 . Entry or exit will take place until fi rms operate at the quantity for which the average total cost (ATC) is minimal. The prevailing market price will be equal to the ATC at its minimum level (e.g. Figure 11-15) There are two ways to fi nd the point where the ATC is minimal: (1) Find the point where MC=ATC. (2) Directly fi nd the point where ATC is minimal. I like the second way better. ATC ( q i ) = C ( q i ) /q i = 0 . 5 q i 4 + 200 /q i . At the minimum the derivative is 0 so we get the FOC 0 . 5 200 /q 2 i = 0 . This gives q i = 20 and hence in the LR equilibrium we have P LR = 0 . 5 20 4 + 200 / 20 = 16 . 3
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