Question

7. Short-run supply and long-run equilibrium Consider the 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 80 72 64 ︵56 ATC 48 0 40 C 32 O 24 16 AVC MC 0 3 69 12 15 18 21 2427 30 QUANTITY (Thousands of tons)

Answer 1

In the short run, firms aim at covering only their average cost and are ready to bear to cost of the fixed assets. Therefore, in the short run, the supply curve of the firm is the upward sloping Marginal Cost (MC) curve, which is above the Average Variable Cost (AVC) curve Therefore, at different price levels, the quantity supplied are as follows Supply of 1 firm (in thousands of pounds) Price (P) 16 40 52 12 15 16 80 18 When N-20, N-40, N-60, the supplies can be calculated by multiplying the quantity supplied by 1 firm by 20, 40 and 60 respectively, as follows Supply of 1 firm (in thousands Supply of 20 firmsinSupply of 40 firms (in Supply of 60 firms (in thousands of pounds) Price (P) of pounds) thousands of pounds)thousands of pounds) 160 320 16 40 15 16 300 320 340 360 640 1020 1080 64 80 The supply curves at different number of firms can be shown in the graph like given below:

72 64 56 - Supply of 20 firms (in thousands of pounds) Supply of 40 firms (in thousands of pounds) 32 -Supply of 60 firms (in thousands of pounds) 16 Demand 0 120 240 360 480 600 720 840 960 1080 1200 If there are 60 firms in the market, the short run equilibrium price of steel would be S40 (Since demand and supply interacts at the point where price is equal to S40)per pound earn a negativeprofit (since the price is less than the average total cost of S52) Therefore, in the long run, firms would exit the steel market. At firms this industry would that price inn Because you know that perfectly competitive firms earn zeroeconomic profit in the long you know the ong-runequilibrium pricemustbe per pound S52 (where the marginal cost curve is equal to the average total cost curve) From the graph, you can see that this means there will be 20 firms operating in the steel industry in the long run equilibrium. True or False: Each of the firms operating in this industry in the long run earns negative The profit. statement accounting given 1S false (if implicit costs are positive, then accounting profit can be positive as accounting profit is a sum of economic profit and implicit costs