Question

Attempts: Keep the Highest: /4 7. Short-run supply and long-run equilibrium Consider the perfectly 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 cost (AC), and average variable cost (AVC) curves shown on the following graph 100 60 AVC 0 10 20 3040 50 60 800100 Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where 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 15 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 20 firms. 100 т Supply (10 firms) Supply (15 Supply (20 firms) 20 10+ 0 123 250 373 500 623 750 873 1000 1123 1250 QUANTITY (Thousands of pounds) per pound. At that price, firms in this industry would If there were 10 firms in this market, the short-run equilibrium price of copper would be s Therefore, in the long run, firms would the copper market. Y economic profit in the long run, you know the long-run equilibrium price Because you know that the perfectly competitive firms earn firms operating in the copper i must be s per pound. From the graph, you can see that this means there will be

Answer 1

If there are 10 firms in the market the short run equilibrium price of the copper will be $40 per pound. At this price Firms in the industry will earn positive profits. Therefore in the long run firm would enter the copper market.

Reason- Short run industry supply curve intersect demand curve at $40 and at this price the MC is greater than ATC. Therefore they will earn positive profits and will encourage more firms to enter the market.

Suppose you know that perfectly competitive firms earn zero economic profit. In the long run you know that equilibrium price must be $30 and From the graph you can see that there will be 15 firms operating in the long run in copper market.

Reason- In the long run firms earn zero profit and produce till P=MC= AVC =$30. At this price the supply curve which meets demand has 15 firms.

90 о -80 70 -60- -50 -40 30 20- 10- Quantity 250 750 1000 375 500 625 875 |25 0 Price