Long Run 7. N2 on page 210 pies are produced by a constant-cost industry where a
ID: 1159577 • Letter: L
Question
Long Run 7. N2 on page 210 pies are produced by a constant-cost industry where all firms are identical and each firm has fixed costs of $15. The following chart shows the industry-wide demand curve and the marginal cost c typical firm: Industry-wide Demand Firm's Marginal Cost Curve Price QuantityQuantity Marginal Cost $5 10 15 20 25 750 600 450 300 150 $5 10 15 20 25 Suppose the industry is in long-run equilibrium. a. b. c. What is the price of moose-nose pies? What is the number of firms in the industry? On the industry-wide short-run supply curve, what quantity corresponds to a price of $10?Explanation / Answer
(a) If the industry is in long run equilibrium, then the firm would produce at the minimum of average cost. The average cost can be found as below.
As can be seen, ATC decreases and then increase. The minimum of average cost is at production level 2 and 3. But, at the same ATC, a firm would induce to produce more, and hence, the firm will be at the ATC of $15 at production level 3. Besides that reasoning, MC cuts ATC at its minimum, which would occur at Q=3.
In the long run, in the perfectly competitive market, the price would be equal to the minimum of the average cost. The resoning takes into consideration that firms enters and exits the market in the long run. If price goes below that point, firms would make losses, and some would leave the market, which would decrease supply, and hence, would increase the price. If the price is above that point, firm would enter the market as there are economic profits, which would increase the supply and hence, decrease the prices. That is why, prices in the long run is at the minimum of the average cost. Hence, the price would be equal to $15.
(b) In the long run, at $15, 450 units of quantity is demanded. An individual firm would supply 3 units at that price. Hence, there would be 450/3 or 150 number of firms.
(c) In the short run, the MC is the supply curve of the firm (specifically, MC above the AVC). As there are 150 firms, the industry wise short run supply would be as in the table below.
Hence, at price or MC of $10, the industry supply would be 300 units. The P=MC criterion is used in the supply curve, as the firm produces anywhere at which the price is equal to the MC.
Q MC TVC TC=TVC+15 ATC 0 0 0 15 - 1 5 5 20 20 2 10 15 30 15 3 15 30 45 15 4 20 50 65 16.25 5 25 75 90 18Related Questions
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