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. The following diagram shows the market demand for copper. 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 20 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 30 firms.

Answer 1

In a competitive industry, a firm's marginal cost curve, except for the portion that falls below the AVC curve, is the firm's supply curve Therefore, according to the given MC curve, an individual firm's short run supply schedule is as follows: P MC 12 20 36 16 24 30 32 34 38 52 72 There are three market scenarios 1. When there are 10 firms in the market, denote the market supply as Q10 2. When there are 20 firms in the market, denote the market supply as Q20 3. When there are 30 firms in the market, denote the market supply as Q30 From the individual supply schedule, we can find the market supply schedule for the three market scenarios, as follows: P-MC 12 20 36 16 24 30 32 34 38 10 160 240 300 320 340 380 20 320 480 600 640 680 760 30 480 720 900 960 1020 1140 52 72

The market supply curves together with the demand curve are graphed below 80 Price Qio 20 30 70 60 52 L__._ 50 40 30 20 Demand curve 10 340 640 0 500 1000 1500 2000 Quantity If there are 10 firms in this market, the short-run equilibrium price of copper would be S52 per pound. As can be seen in the table, at the price of $52, each firm will supply 34 thousand pounds of copper. At this level of output, the ATC is less than $52, implying that the firms in the industry would make profit in the short run Therefore, in the long run, firms wouldenter the industry. Because we know that competitive firms earn zero economic profit in the long run, we know the long run equilibrium price must equal the minimum ATC, which is $44 per pound. When price equals $44, each firm supplies 32 thousand pounds of output and the quantity demanded in the market is 640 thousand units of output, which implies that 20 (640/32) firms will operate in the industry in the long ruin The given statement is false. In the long run, firms make zero economic profit and positive accounting profit