Question

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 0 ATC 32 O 24 AVC 0 3 6 912 15 18 2124 27 30 QUANTITY (Thousands of pounds)

Answer 1

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

P	Qs (1 firm)	Qs (20 firms)	Qs (40 firms)	Qs (60 firms)
16	12	240	480	720
40	15	300	600	900
52	16	320	640	960
64	17	340	680	1020
80	18	360	720	1080

(All quantities are in thousands)

90T 80 70 60 50 Qs (20 firms) Qs (40 firms) Qs(60 firms) 30 Demand 20 10 0 200 400 600 800 1000 1200 Quantity (thousands of pounds)

If there were 60 firms in this market, the short run equilibrium price of copper would be $ 40 per pound. At that price, firms in this industry would make a loss. Therefore, in the long run, firms would exit the copper market.

Because you know that competitive firms earn zero economic profit in the long run, you know that long run equilibrium price must be $ 52 per pound. From the graph, you can see that this means there will be 20 firms operating in the copper industry in long run equilibrium.

The statement is true (accounting profit = economic profit + implicit costs)