Question

6. Short-run equilibrium Consider a perfectly competitive market for wheat in Halifax. There are 120 firms in the industry, each of which has the cost curves shown on the following graph: 100 90 мс о 80 60 АТС 50 40 AVC 20 10 0 5 10 15 20 25 30 35 40 45 50 OUTPUT (Thousands of bushels) COST (Cents per bushel) 70

Answer 1

+00 40 Supplrs 70 G0 So Dimand 30 20 to 600 1200 1800 2Y00 3000 3600 4200O 4800 S400 6000 Suautly (thausands bushila) PRICE (Cemts per buuhil)

At the current short run market price, firms will produce in the short run. In the long run, the firms will neither enter or exit the market given the current market price. A firm will stop the production in the short run if the market price falls below the minimum average variable cost. Here, the Minimum AVC point is at $25 while our Market price is at $55 which is higher than shutdown point so we will continue to produce. In long run, no entry or exit is allowed from the industry.