Question

6. Suppose that the trucking market is a perfectly competitive industry in long run equi librium. Each of the identical trucking firms has the same (long run) cost function: TC = 2250 + 10q2, where q is the volume of sales by each establishment. Each of the identical firms therefore have the same marginal cost: MC = 20q (a) What is the average cost function for the identical trucking firms? (b) How much does each individual firm produce in the long run competitive equilib- rium? (c) What price do you expect to observe in the long run competitive equilibrium? (d) If the market quantity demanded at the price you solved for in (b) is 30,000, how many trucking firms do you expect to observe in the marketplace? (e) What can you say about the economic profits earned by each of the individual firms? Does the same statement hold true for accounting profits? Why or why not?

Answer 1

a)  

TC = 2250 + 10q²

AC = TC/q  

= 1/q(2250 + 10q² )

= 2250/q + 10q

b) MC = 20q

IN Long run equilibrium

P = MC = AC

MC = AC

20q = 2250/q + 10q

20q - 10q = 2250/q

10q = 2250/q

10q² = 2250

q² = 2250/10

q² = 225

q = 15

thus, each individual firm will produce 15 units in long run

c) P = MC

= 20q

= 20(15)

= 300

thus, long run equilibrium price is 300

d) Now market demand Q = 30000 is given at long run equilibrium price i.e.30

So number of firms = Q/q

= 30,000/300

= 100

Therefore, there are 100 firms in marketplace.