Question

7. Short-run supply and long-run equilibrium Consider the competitive market for copper. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph

Answer 1

Answer:

Price	Quantity	Industry Supply = Qty * No. of Firms (10 firms)	Industry Supply Qty * No. of Firms (15 firms)	Industry Supply Qty * No. of Firms (20 firms)
15	30	300	450	600
30	40	400	600	800
40	45	450	675	900
70	55	550	825	1100
90	60	600	900	1200

If there were 20 firms in this market, the short-run equilibrium price of copper would be $15. At that price, firms in this industry would Operate at loss (< ATC) Therefore, in the long run, firms would exit the market the copper market.

Because you know that competitive firms earn zero economic profit in the long run, you know the long-run equilibrium price must be $30 per pound. From the graph, you can see that this means there will be 10 firms operating in the copper industry in long-run equilibrium.

True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns negative accounting profit.

False

Reason:

If implicit cost is positive then economic profit would always be lower than accounting profit. Thus accounting profit would be positive.