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 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 40 firms. Finally, use the green points (triangle symbol) to

plot the short-run industry supply curve when there are 60 firms.

If there were 60 firms in this market, the short-run equilibrium price of copper would be _______  per pound. At that price, firms in this industry

would _______ . Therefore, in the long run, firms would _______  the copper market.

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

• True

• False

Answer 1

A firm will supply as long as Price is equal to or more than its average variable cost

Setting P=MC, the quantity supplied by a single firm and 20,40 and 60 firms is as follows:

P	S=1 FIRM	S=20 FIRMS	S=40 FIRMS	S=60 FIRMS
4	0	0	0	0
16	12000	240000	480000	720000
40	15000	300000	600000	900000
52	16000	320000	640000	960000
64	17000	340000	680000	1020000
80	18000	360000	720000	1080000

If there were 60 firms in this market,the short run equilibrium price would be $40 at which firms in this industry would earn negative profits therefore in the long run firms would exit the market.

Because you know that competitive firms earn zero economic profit in the long run you know the long run equilibrium price must be $52 which means there will be 20 firms operating in the long run.

The statement is False

Answer 2

All numbers and plot points are correct but 

"If there were 60 firms in this market, the short-run equilibrium price of steel would be $40 per ton. At that price, firms in this industry would OPERATE AT A LOSS. Therefore, in the long run, firms would exit the steel market."