Consider a perfectly competitive market for titanium. Assume that all firms in t
ID: 1199779 • Letter: C
Question
Consider a perfectly competitive market for titanium. Assume that all firms in the industry are identical and have the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph. Assume also that it does not matter how many firms are in the industry. Tool Tip: Place the mouse cursor over orange square points on the MC curve to see coordinates. COST (Dollars per pound 10 MC ATC AVC 0 5 10 1520 25 30 35 40 45 50 OUTPUT PER PERIOD IThousands of pounds per day. The following diagram shows the market demand for titanium. Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 20 firms in the market. (Note: Ignore the portion of the supply curve that corresponds to prices at which there is no output, since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 30 firms. Finally, use the red points (cross symbol) to plot the short-run industry supply curve when there are 40 firms.Explanation / Answer
MC curve will give us individual supply curve and by multiplying it by number of firms, we may get market supply curve.
Price 1 2.5 4 9
Quantity (40 firms) 400 800 1000 1400
Quantity (30 firms) 300 500 750 1050
Quantity (20 firms) 200 400 500 700
With 40 firms in the market, the short run equilibrium price will be $2.5 per pound. At this price, firms in the market would be incurring losses as this price is less than AVC per unit. therefore, some firms will quit the market in the long run.
Because you know that perfectly competitive firms earn normal economic profits in the long run, you know long run equilibrium must be per pund. from the graph one can see that there will be 30 firms operating in titanium industry in the long run because in long run price = ATC i.e. it must be equal to $4. At dollar four demand = 500 unints so supply should also be 500 units. It is 500 units when there are 30 firms.
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