1. Consider a perfectly competitive market with a price of $21, where each firm has a cost functionof c(q) = 10 + q + ²q².a) Is the market in long-run equilibrium? Explain why or why not.b) What is the value to a firm of a cost-saving process innovation that reduces the cost function toc(q) = 5 +0.5q²?c) Illustrate this innovation graphically using a well-labeled diagram.

Answered: 1. Consider a perfectly competitive…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Consider a perfectly competitive market with a price of $21, where each firm has a cost function
of c(q) = 10 + q + ²q².
a) Is the market in long-run equilibrium? Explain why or why not.
b) What is the value to a firm of a cost-saving process innovation that reduces the cost function to
c(q) = 5 +0.5q²?
c) Illustrate this innovation graphically using a well-labeled diagram.

Expert Solution

Step 1

In the short run, firms in perfectly competitive markets can earn a profit. However, this attracts new firms into the market and causes them to raise the supply. A rise in the supply causes the price to fall until it reaches the average total cost of the firm.

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