Consider a competitive industry with free entry in which the marginal cost for each firm is MC = 2.00 + 0.40q and AC = 2.00 + 0.20q +

20/q where q is the firm’s output. Assume that the firm’s fixed costs are unavoidable in the short run.

a. Find the LR equilibrium quantity supplied by each firm. Find the LR equilibrium price and the LR equilibrium market supply

curve.

b. Suppose the inverse market demand for the good produced by this industry is given by p = 26 - 0.004Q, where p is the market price and Q is the market quantity. If the industry is in long-run equilibrium, what will be the market price and quantity, and how many firms will be in the industry?

c. Now suppose the demand for the product decreases, so the inverse market demand falls to p = 20 - 0.004Q. What will be the SR effect on price? On firm and industry output?

d. After the fall in demand, determine the LR effect on firm and industry output, and price.

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