Widgets are supplied by a competitive constant-cost industry, which is in both l

Question

Widgets are supplied by a competitive constant-cost industry, which is in both long run and short run equilibrium. The following graph shows the market demand curve and the market short-run supply curve: S8 S7 S6 S5 $4 $2 $1 100 200 400 500 600700 800 There are 40 firms in the industry. One day the government announces a permanent ercise subsidy (so that from now on, firms will receive a certain fixed amount from the government per widget produced). As a result, the price of a widget falls in the short run to $3. a) In the short run, what is the new quantity produced per firm? b) In the long run, what is the new quantity produced per firm? c) In the long run, how many firms enter or leave the industry?

Explanation / Answer

a) Since price is now $3 in the short run, there will be 40 firms, but each one will receive a subsidy so supply curve is shifted enough to the right so that short run price is $3 and short run market qunatity is 600 units. With 40 firms, each firm produces 600/40 = 15 units now

b) Long run quantity will remain unchanged at 400/40 = 10 units

c) To have long run quantity per firm remain at 10 units with market quantity 600 units there will be 600/10 = 60 firms in the long run, Hence 20 firms will enter the market

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