Comparative Equilibrium Analysis in a Competitive Market
Consider a perfectly competitive market where the market demand is given by the equation Q = 1200 - 20P. All firms in this market are identical, and each has a total cost function of TC = 50 + 2q², where q is the quantity produced by a single firm.
- Initially, there are 20 firms operating in the market. Calculate the short-run equilibrium price, the quantity produced by each firm, and the total market quantity.
- Now, assume firms can freely enter or exit the market. Determine the long-run equilibrium price, the quantity produced by each firm, the total market quantity, and the number of firms in the market.
- Analyze and explain the differences between the short-run and long-run equilibrium outcomes you calculated. What economic process accounts for the transition from the short-run to the long-run state?
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