Question

Introduction to Microeconomics Deriving the Short-Run Supply Curve for the Perfectly Competitive Firm Cost $ 0 10 20 30 40 50 60 70 80 90 100 110 Outputs tunits) The figure illustrates the costs faced by a perfectly competitive firm. Use the figure to answer the following: 1) Based on the above, indicate on the graph, the short-run market supply curve for the perfectly competitive firm. 2) At what price will the firm shut-down? Will the firm leave the industry? Explain. 3) At what price does the firm break-even? 4) If the price is $10, what are the firm's profits? 5) Between the prices $10 and $15, what is the goal of the producer? 6) If new firms enter the industry, explain what will happen to the firms already in the industry. Use the supply and demand model to support your answer.

Answer 1

1)

The short run supply curve is the portion of the MC curve from Point A to Point B

ATC AVC Cost ($) 0 10 20 30 40 80 90 100 110 50 60 70 Outputs (units)

2) The firm will shut down when the price falls below the minimum AVC as it will be unable to recover its daily variable costs of running the business so P=10

The firm will leave the market when the price falls below the minimum ATC as it means that the firm is unable to recover its total cost in the long run so P=15

3) The firm will break even when Price = Minimum ATC = 15 where total cost = total revenue

4) When P=10, the firm will incur loss as the price is less than ATC

Loss = (P-ATC)*Q

= (10-16)*60 = -360