D1 MC D2 ATC 65 AVC 30- 12 . 2750 3250 20 80 110 130 2. If a change in consumer
ID: 1107965 • Letter: D
Question
D1 MC D2 ATC 65 AVC 30- 12 . 2750 3250 20 80 110 130 2. If a change in consumer preferences causes market demand to decrease to D2, price will now equal dollars. If the typical firm produces at all, it will maximize profit by producing u nits of output. The firm's total revenue will equal will earn a profit/suffer a loss equal todollars. If the firm shuts down it will lose dollars. Thus the firm will operate/shut down in the short run. In fact, the firm will operate in the short run at any price above dollars. Total cost will equal dollars. The firm's short-run supply curve is its curve above dollars. There are firms in this market. -Explanation / Answer
Answer - Industry demand and supply showed in the graph given to the left. Demand curve is linear. This diagram showed equilibrium price $75 per unit in the starting where D1 intersect supply curve. Change in consumer preference causes shift in the demand curve to the left. Now new demand curve' D2' intersects supply curve on other point which shows new equilibrium price and quantity. New equilibrium price is $55 per unit.
The typical firm will take market price as given and adjust its quantity. Typical firm will produce where firm's profit maximizes (MR=MC). After change in consumer preference MR curve is horizontal at price $55 for the typical firm and this firm will produce 110 units.
Total revenue of the firm TR = P*Q
TR = 55*110
TR = $6050
Total cost will be TC, = Q*ATC
TC = 110 * 65
TC = $7150
The firm will suffer from loss by, 7150 - 6050
Loss = $1100
The firm will suffer $1100 loss.
If the firm shuts down then firm must have to bear loss equal to fixed cost. Total cost is $7150. At output level of 110 units total variable cost TVC = AVC*Q
TVC = 40*110
TVC = $4400
Firm's fixed cost is (TFC) = TC - TVC
TFC = 7150 - 4400
TFC = $2750
Thus the firm will operate in the short run; in fact the firm will operate at any price above minimum AVC (30 per unit).
The MC curve of the firms which is above minimum AVC (30 per unit) point represents firm's supply curve.
Total market supply is 2750 units and a single firm supplies 110 units. There will be,
No. of firms in the market = 2750/110
No. of firms in the market = 25 firms
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