Question

Quick question I need answered as soon as possible

3. 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. (5) 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. (5) 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? (5) d. How would your answer to (c) be different if this were an increasing costs industry? (5)

Answer 1

a.

b.

Pence sMe SAC y = 10 Quantity

СМС > LOSS ISAC pt = 6 WHLOSS THAT MR =P = 5 t -D=AR=MR. Quantity y =10

c. Taking into consideration that it is a constant cost industry, we conclude that the Long Run Average Cost (LAC) is independent of the quantity of goods produced. The long-run equilibrium price in the industry would be the minimum of LAC, and the supply on per firm basis would be completely driven by the dynamics of demand in the long run, but in the scenario of constant cost industry, the short-run marginal cost curve (the positive part of the SMC is the supply curve of the firm.) is equal to the long-run marginal curve. Whenever there is a deviation from a long industry supply curve (horizontal line at minimum LAC), the firm's output fluctuates, but returns to minimum LAC with change firm and industry output as per change in demand.

d. In an increasing cost industry, the cost of input variables increases with an increase in production. Therefore, if like the constant cost industry, where LAC is independent of output level, in increasing cost industry, as the output increases as a result of increased demand, the cost input variable rises, and causes the LACs to rise (as new firms enter the market, and tee input variables available to each firm in the industry decreases, driving the prices up.) There is an increase in production on the firm level, but at an increased cost.