Question

Suppose the competitive tablet market is in long-run equilibrium. If at this equilibrium, the typical firm produces 10,000 tablets per month, total costs for this production is $2,000,000, and the minimum of the average variable costs is $75, what price will a. Induce entry into the market? When the price rises above $ b. Cause firms to shut down production in the short run? When the price falls below $ c. Result in firms exiting the market in the long run? When the price falls below $

Answer 1

Production of a typical firm in a competitive tablet industry = 10,000 per month

Total Production Costs = $2,000,000

Average Total Costs = Total Cost/Number of tablets produced = $2,000,000/10,000 = $200

If the firms are experiencing positive economic profits, it will induce new firms to enter into the market.

Profit = Total Revenue - Total Cost = Price * Quantity - ATC * Quantity > 0

=> Price * Quantity > ATC * Quantity

=> Price > ATC

=> Price > $200

a. When the price rises above $200, it will induce new firms to enter the market

b. When the price falls below $200, there will be negative economic profits and this will lead to the exit of some firms from the market

Given,

Minimum of the average variable cost = $75

When a firm is unable to recover its variable costs from the revenue in the short-run, the firm shuts down. Thus, a firm continues to produce as long as the price of a tablet is above the minimum average variable cost i.e., until price > $75

c. A firm shuts down production in the short-run if the price of a tablet falls below $75