Question

Cost curves, profits/losses, and long-run equilibrium:

a. Draw typical short run average cost and marginal cost curves for a firm (costs on the vertical axis, q on the horizontal axis), such that marginal cost = average cost= 6 at q=10.

b. Suppose this firm operates as a perfect competitor in a market with a short run equilibrium price of $5. Illustrate on your graph the area indicating the short run profit or loss experienced by this firm, given the cost curves in part (a) and this price.

c. Assume all firms in this industry face these same costs, and assume that this is a “constant costs”industry. What can you say about the long-run equilibrium price in this industry? What can you say about long-run firm-level output?

d. How would your answer to (c) be different if this were an increasing costs industry?

Answer 1

MC Ac 10 thb Mc/AC -P-P t0 mlenctaut Cesd quiku price md ill le uwckegd-but Equhki Cnt put ailLintceseton tsly taut lest fodhiy fee r Extereummicel hes claecontmick Cosit Cer Poce बी

mcresss DTncaeasing Lert Incluestypresened y imbutput wib increaleimlest nceasirg have upuerrd upply curue aud Expansion inalemand aswellt feces eLonomics ad ausecenanmed m tnaduelhon Eafernal lert tcseasiy lest tomdushy auaya feas dkuentmies Lnereasuy Lort Industy abaaye hase hfen because forsere Eaeh frm wtl have esdtbut clue to tucak Equitbmum farice oillbe high Output at higher rices Lmereasng los Conditiny aud to Cover