Question

 5. Short-run supply and long-run equilibrium

 Consider the competitive market for steel. 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 steel.

 Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 20 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 30 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 40 firms.

 If there were 20 firms in this market, the short-run equilibrium price of steel would be _______  per ton. At that price, firms in this industry would _______  . Therefore, in the long run, firms would _______  the steel market.

 Because you know that competitive firms earn _______  economic profit in the long run, you know the long-run equilibrium price must be _______  per ton. From the graph, you can see that this means there will be firms operating in the steel industry in long-run equilibrium.

 True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns positive accounting profit. 

•  True

•  False

Answer 1

Supply curve is represented by the upward sloping region of MC curve . Therefore, from the question figure ,we can derive the table as shown below:

Price	Quantity	Q20 = Q(20)	Q30 =Q(30)	Q40 = Q(40)
10	10	200	300	400
15	15	300	450	600
30	20	400	600	800
40	22	440	660	880
70	27	540	810	1080
90	30	600	900	1200

Now, by plotting these points , we get S₂₀, S₃₀ and S₄₀ supply curve as shown below:

If there were 20 firms in this market, the short-run equilibrium price of steel would be $40 per ton(because demand equals S₂₀ at this price) . At that price firms in this industry would earn positive profits (because P>ATC) . Therefore, in the long run, firms would enter in the steel market.

Because we know that competitive firms earn zero economic profits in the long run , we know the long run equilibrium price must be $30 per ton (where P=minimum ATC). From the graph, we can see that this means there will be 30 firms operating in the steel industry in long run equilibrium (Because $30 is the equilibrium price for 30 firms , as demand equals S₃₀ at $30.)

TRUE If implicit costs are positive,then accounting profits are also positive.