Question

Suppose that for each firm in the perfectly competitive market for potatoes, long-run average cost is minimized at $0.20 per pound when 500 pounds are grown. The market demand function for potatoes is Q = 10,000/p. If the long-run supply curve is horizontal, then in the long run equilibrium the total expenditure by all consumers on potatoes will be ______ and there will be _______ firms in the industry.

A) $50,000, 20
B) $10,000, 20
C) $10,000, 100
D) $50,000, 100
E) None of the above

Answer 1

In a perfectly competitive market with a horizontal long-run supply curve, the total expenditure by all consumers on potatoes will be $10,000 and there will be 100 firms in the industry.

Step-by-step explanation:

In a perfectly competitive market for potatoes with a long-run supply curve that is horizontal, the total expenditure by all consumers on potatoes will be $(market demand * equilibrium quantity).

To find the equilibrium quantity, we set the quantity demanded equal to the quantity supplied. Using the given market demand function Q = 10,000/p and the fact that the long-run average cost is minimized at $0.20 per pound when 500 pounds are grown, we equate market demand to the quantity supplied at $0.20 per pound:

1. Q = 10,000/p = 500 pounds.
2. p = 10,000/500 = $20 per pound.
3. Equilibrium quantity = Q = 10,000/20 = 500 pounds.

Substituting these values into the equation for total expenditure, we get: Total expenditure = 10,000/20 * 20 = $10,000.

Since there is only one firm producing potatoes in this perfectly competitive market, the answer is: C) $10,000, 100 firms.