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Suppose the wheat growing industry in Canada is perfectly competitive and there is free entry in the long run. The market demand function is Qd = 615 - 5P , which is measured in tons per month. Each producer in the industry has a fixed cost of $400 and a marginal cost function given by M C = 2q + 3, where q is the output of an individual producer.
(a) Calculate the long-run market equilibrium price and quantity. How many firms are there in the economy? Suppose the marginal cost decreases by $2 from the long-run equilibrium.
(b) Calculate the new short-run market equilibrium price and quantity.
(c) Are the firms making economic profit or loss in the short run? Explain briefly without calculation.
(d) Draw a graph to show the short-run response of the economy. Mark the equilib- rium price and quantity clearly on the graph.
(e) Now suppose, in addition to the change of the marginal cost, the fixed cost increased by $100. Will the number of firms increase or decrease in the long run? Explain briefly.
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