Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive. In the long run, the equilibrium price will be _____ per gallon, and each firm's profit-maximizing quantity will be ______ gallons per week.
A)$20; 4 hundred
B)$15; 6 thousand
C)$15; 3 hundred
D)$20; 4 thousand

Question

Assume that all firms in this industry have identical cost curves, and that the market is perfectly competitive.  In the long run, the equilibrium price will be _____ per gallon, and each firm's profit-maximizing quantity will be ______ gallons per week.
A)$20; 4 hundred 
B)$15; 6 thousand 
C)$15; 3 hundred 
D)$20; 4 thousand

Quizplus · Accepted Answer

In a perfectly competitive market, in the long run, price will be equal to the minimum of the average total cost curve. Since all firms have identical cost curves, the equilibrium price will be the same as the minimum of the cost curve. And, profit is maximized where marginal cost equals price. So, each firm's profit-maximizing quantity will be the quantity where marginal cost equals the price. The answer choices A and D have conflicting answers for equilibrium price. Answer choice B has an unrealistic profit-maximizing quantity. Therefore, the best choice is C with a price of $15 per gallon and a profit-maximizing quantity of 300 gallons per week.

Assume That All Firms in This Industry Have Identical Cost