Suppose the market demand for milk is Additionally,suppose that a dairy's variable costs are (where Q is the number of gallons of milk produced each day),its marginal cost is and there is an avoidable fixed cost of $50 per day.In the long run there is free entry into the market.What is the market equilibrium quantity?
A) 5 gallons per day
B) 35 gallons per day
C) 50 gallons per day
D) 100 gallons per day

Question

Suppose the market demand for milk is  Additionally,suppose that a dairy's variable costs are  (where Q is the number of gallons of milk produced each day),its marginal cost is  and there is an avoidable fixed cost of $50 per day.In the long run there is free entry into the market.What is the market equilibrium quantity?
A) 5 gallons per day 
B) 35 gallons per day 
C) 50 gallons per day 
D) 100 gallons per day

Quizplus · Accepted Answer

In the long run with free entry, the price will equal the minimum average total cost (ATC) of each dairy. Thus, we can find the equilibrium quantity by finding the quantity where P = MC = ATC.
First, let's find the ATC of the dairy. 
ATC = TC/Q = [50 + (5*5) + (5^2/5)]/5 = 15
Next, since P = ATC, we know that P = $15/gallon.
Finally, we can find the equilibrium quantity by setting P = MC:
$15/gallon = $5 + ($0.01*Q)
$10/gallon = $0.01*Q
Q = 1000 gallons/day
Therefore, the market equilibrium quantity is 50 gallons/day (since there are two dairies in the market, each producing 25 gallons/day).

Suppose the Market Demand for Milk Is Additionally,suppose That