ttempts: Average: 0./ 6. Deriving the short-run supply curve Consider the compet
ID: 1114347 • Letter: T
Question
ttempts: Average: 0./ 6. Deriving the short-run supply curve Consider the competitive market for sports jackets. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry. 0 10 20 30 40 50 00 80 90 00 QUANTITY (Than andd mats) For each price in the following table, use the graph to determine the number of jackets this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero jackets and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lasty, determine whether it will make a profit, suffer a loss, or break even at each price. Quantity On the following graph, use the orange points (square symbol) to plot points along the portion of the firm's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.)Explanation / Answer
Assuming the firm is price taker, we have Price = Average Revenue = Marginal Revenue, ie P = AR = MR, since P curve is horizontal. The quantity the firm will produce will at where MR=MC, the marginal cost curve of the firm. Some points to keep in mind:
The table provides the answer:
The firm's short run supply is the MC curve above the AVC curve.
The market supply, ie supply curve of all the 7 firms will be equal to points satisfying price and (7*Q), as 7 firms will produce 7Q output, if one produce Q output, as shown in this table:
Q is taken form the first table, corresponding to P. As we can see in the demand curve, at P=55, Q=420. Thus it will be the market equilibrium.
For all the firms, at this price of 55, the firm will PRODUCE in the short run with normal profit; and since is the long run production point, will PRODUCE in the long run with normal profit, and will shut down only if price goes below 55.
Price Quantity Produce/Shut Down Profi/Loss 15 30 Shutdown Loss 20 40 Shutdown Loss 25 45 Indifferent Loss 55 60 Indifferent No profit - No loss 70 65 Produce Profit 85 70 Produce Supernormal ProfitRelated Questions
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