Perfectly Competitive Market

The box industry is perfectly competitive. The lowest point on the long run average cost curve of each identical producer is £4.00, and this minimum point occurs at an output of 1,000 boxes per month. When the optimal scale of a firm’s plant is operated to produce 1,150 boxes per month, the short run average cost of each firm is £5. The market demand function for boxes is:

𝑄𝑑 = 140,000 − 10,000𝑃

Where P is the price of a box, and Qd is the quantity of boxes

demand per month. The market supply curve for boxes is:

𝑄𝑠 = 80,000 + 5,000𝑃

Where Qs is the quantity of boxes supplied per month, and P is expressed in pounds (£) per box

(a) Explain the characteristics of a perfectly competitive industry.

(b) What is the equilibrium price of a box? Is this the long-run equilibrium price?

(c) How many firms are in the industry when it is in long run equilibrium?

(d) If the market demand function for boxes changes to:

𝑄𝑑 = 150,000 − 5,000𝑃

Calculate the new equilibrium price and output in the short run, for both the industry and each firm

(e) In the situation described in part (d) are firms making profits or losses? (Assume that the number of firms in the industry equals the number that would exist in long run equilibrium). (f) Starting from a situation where firms in a perfectly competitive industry are making abnormal profits, explain how the industry achieves long-run equilibrium

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