# ITS A CASE STUDY BASED ON COST FUNCTION IN PERFECT COMPETITION

Case StudyThe market for study desks is characterized by perfect competition. Firms and consumers are price takersand in the long run there is free entry and exit of firms in this industry. All firms are identical in terms of theirtechnological capabilities. Thus the cost function as given below for a representative firm can be assumedto be the cost function faced by each firm in the industry. The total cost and marginal cost functions for therepresentative firm are given by the following equations:TC = 2qs*2+ 5qs + 50MC = 4qs + 5Suppose that the market demand is given byPD = 1025 – 2QDNote: Q represents market values and q represents firm values. The two are different.Question 1: At the new long run equilibrium, how many firms will be in the industry?a. 32b. 45C. 150d. 230Question 2. At the new long-run equilibrium, what will be the output of each representative firm in theindustry?a. 4b. 5C. 3d. 2Question 3. Determine the equation for average total cost for the firma. 2qs + 2 + 50/qsb. 2qs + 5+ 50/qsc. 3qs + 5 + 50/qsd. None of the aboveQuestion 4. Determine the market quantity Q from the market demand curve, given that we know the abovecalculated market price.a. 23b. 504C. 34d. 89Question 5. In the long-run given this technological advance, how many firms will there be in the industry?a. 34b. 84c. 32d. 56Question 6. Now suppose that the number of students increases such that the market demand curve forstudy desks shifts out and is given by, PD = 1525 – 2QD . What will be the new long-run equilibrium price inthis industry?a. 25b. 34C. 23d. 45Question 7. Now, consider another scenario where technology advancement changes the cost functions ofeach representative firm. The market demand is still the original one (before the increase in the number ofstudents). The new cost functions are: TC = qs*2+5qs + 36 MC = 2qs + 5 What will be the new equilibriumprice?a. 17b. 4C. Zd. 6Question 8. What is the long run equilibrium price in this market?a. 12b. 14C. 25d. None of the aboveQuestion 9. What is the long-run output of each representative firm in this industry?a. 5b. 3C. 6d. 7Question 10. When this industry is in long run equilibrium, how many firms are in the industry?a. 3b. 80C. 400. 100