3. Short-run supply and long-run equilibrium Aa Aa Consider a perfectly competit

Question

3. Short-run supply and long-run equilibrium Aa Aa Consider a perfectly competitive market for steel. 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. CoSTS (Dollars per ton) 1000 900 800 700 600 500 400 300 200 100 Mc ATC AVC 0 5 10 15 20 25 30 35 40 45 50 QUANTITY OF OUTPUT (Thousands of tons)

Explanation / Answer

Supply curve of the industry would be portion of MC at shut down point and abov abd shut down point is where p= AVC.

Shut run equilibrium price would be $500(simply superimposing supply curve over Market demand curve we get price equal $500. Firms in the industry will have supernormal profit. In long run firms will exit the market.

Perfectly competitive firms earn normal profit . Long run price would be $400 and 20 firms operating in the industry

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