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. 16, 52 COSTS (Dollars per pound) AVC + D + 0 + 3 MC D + + + + + + + 6 9 12 15 18 21 24 QUANTITY (Thousands of pounds) + 27 30 The following diagram shows the market demand for titanium.

Answer 1

Answer:

P	Q(1 firm)	Qs(20 firm)	Qs(40 firm)	Qs(60 firm)
16	12	240	480	720
40	15	300	600	900
52	16	320	640	960
64	17	340	680	1020
80	18	360	720	1080

Supply (20 firms Derand Supply (40 firms) PRICE (Dollars per pound) Supply (60 firms) 0 120 1080 1200 240 360 480 800 720 840 960 QUANTITY (Thousands of pounds)

If there were 60 firms in this market, the short-run equilibrium price of titanium would be $40 per pound. At that price, firms in this industry would earn a negative profit (P < ATC). Therefore, in the long run, firms would would exit the titanium market.

Because you know that competitive firms earn zero economic profit in the long run, you know the long-run equilibrium price must be $54 per pound. From the graph, you can see that this means there will be 20 firms operating in the titanium 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 positive accounting profit.

True