Question

5. Short-run supply and long-run equilibrium Consider the perfectly 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. COSTS (Dollars per ton) + MC D AVC 0 10 90 100 20 30 40 50 60 70 80 QUANTITY (Thousands of tons)

Answer 1

The part of MC curve above the minimum AVC ($15) is the supply curve.

For 10 firms multiply Q at each level by 10.

For 15 firms multiply Q at each level by 15.

for 20 firms multiply Q at each level by 20.

10 Firm. 15 firm. 20 Firm PRICE 0 125 250 375 500 525 750 875 1000 1125 1250 Quantity

If there were 10 firms in this market, the short run equilibrium Price of steel would be $40. Firms will earn POSITIVE ECONOMIC PROFIT and in the long run firms would ENTER THE MARKET

reason- SUPPLY EQUALS DEMAND When P=$40 . At this level P is greater than ATC, Profit = (P-ATC) Q. If P>ATC, Profit are positive which attracts new firms in the market.

Because you know perfectly competitive firm earns NORMAL PROFIT. Long run equilibrium Price must be $30. There will be 15 firms in the long run.

reason- In the long run, P=Min ATC=$30. $30 Is equilibrium Price in case of 15 firms.