Question

Аа Аа 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. COSTS Dollars per pound) 10 MC 9 8 7 ATC AVC 3 2 1 0 5 10 15 20 25 30 35 40 45 50 QUANTITY OF OUTPUT (Thousands of pounds) 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.

Answer 1

Answer:

The graph;

PRICE (Dollars per pound 10 Supply (20 firms] 9 8 7 Supply (30 firms 6 5 Supply 140 firms] 4 3 2 1 Demand 0 200 400 600 800 1000 1200 1400 1600 QUANTITY (Thousands of pounds! Help Clear All Sith 20 firms in this market, the short-run equilibrium price of titanium would be $6 per pound. At that rice, firms in this industry would make a positive profit. . Therefore, in the long run, firms would enter the titanium market. ecause you know that perfectly competitive firms earn zero economic economic profit in the long run, u know the long-run equilibrium price must be $4 per pound. From the graph, you can see that this eans there will be 30 firms operating in the titanium industry in long-run equilibrium.

The supply curves meet the demand curve at different points. Their meeting points show the price of the product. Thus, when there 20 firms in the market, price is $6 which is higher than the ATC ($4). So firms make a positive profit. As there is no barrier to entry in perfect competition, more firms will enter to get a share in the profitability of the industry, increasing the quantity avilable in the market. This will drive the price down. When the number of firms increases from 20 to 30, quantity increases from 600 units to 750 units. This will dirve the price down from $6 to $4, which is also equal to ATC. Now the firms will earn zero economic profit. This is the long term equilibrium condition of firms in perfect competition. Thus, we know that, in the long run, there will be 30 firms in the market.