Question

7. Short-run supply and long-run equilibrium Aa Aa 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 kilogram 10 MC ATC AVC 0 5 10 15 20 25 30 35 40 45 50 QUANTITY OF OUTPUT IThousands of kilograms per 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. PRICE (Dollars per kilogram) 10 Supply (20 firms)

Answer 1

Supply curve is same as the marginal cost curve above the shutdown point.

P ($)	Qs (1 firm)	Qs (20 firms)	Qs (30 firms)	Qs (40 firms)
1.5	15	300	450	600
2.5	20	400	600	800
4	25	500	750	1000
6	30	600	900	1200
9	35	700	1050	1400

With 20 firms in this market, the short-run equilibrium price of titanium would be $ 6 per kilogram. At that price, firms in this industry would make an economic profit (P > ATC). Therefore, in the long run, firms would enter the titanium market.

10 8 -Qs (20 firms) --Qs (30 firms) -Qs (40 firms) a 4 Demand 0 200 400 600 800 1000 1200 400 1600 Quantity (thousands of kgs)

Because you know that perfectly competitive firms earn zero economic profit in the long run, you know the long run equilibrium price must be $ 4 per kilogram. From the graph, you can see that this means there will be 30 firms operating in the titanium industry in long run equilibrium.