Question

5. Short-run supply and long-run equilibrium

Consider the competitive market for titanium. 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.

Consider the competitive market for titanium. 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. COSTS (Dollars per pound) + MC O AVC 0 + 0 + 10 + + + + + 20 30 40 50 60 70 80 QUANTITY (Thousands of pounds) + 90 100

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	Q10 = Q(10)	Q15 =Q(15)	Q20 = Q(20)
10	20	200	300	400
15	30	300	450	600
30	40	400	600	800
40	45	450	675	900
70	55	550	825	1100
90	60	600	900	1200

Now, by plotting these points , we get S₁₀, S₁₅ and S₂₀ supply curve as shown below:

Price (Pollars per pound) Eslo ASS P Szo -Demand 0 125 250 37550-625750875 1000 1125 1250 Quantity (Thousands of pounds,

If there were 10 firms in this market, the short-run equilibrium price of titanium would be $40 per pound(because demand equals S₁₀ 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 titanium 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 pound (where P=minimum ATC). From the graph, we can see that this means there will be 15 firms operating in the titanium industry in long run equilibrium (Because $30 is the equilibrium price for 15 firms , as demand equals S₁₅ at $30.)

FALSE because if implicit costs are positive , accounting profit must be positive in the long run.