Question

Entire Market Representative Firm 30T S1 30 25 S2 25 MC ATC AVC 20 S3 20 Price ($/gallon) 15 Price ($/gallon) 1 15 10 10 5 5 D - 0 + 0 -- 0 2 4 6 8 10 12 0 1 2 3 4 5 6 Q (thousands of gallons/week) Q (hundreds of gallons/week)

• If S1 is the market supply curve, then in the short run, the profit-maximizing level of output for a single firm in this market is how many gallons per week?
• If S2 is the market supply curve, then in the short run, the profit-maximizing level of output for a single firm in this market is how many gallons per week?
• If the market supply curve is given by S1, then would we expect firms to enter the market, exit the market, and/or stay (if they’re already in it) in the long run?
• If the market supply curve is given by S2, then would we expect firms to enter the market, exit the market, and/or stay (if they’re already in it) in the long run?
• If the market supply curve is given by S3, then would we expect firms to enter the market, exit the market, and/or stay (if they’re already in it) in the long run?
• If the market supply curve is given by S1, then would we expect firms to enter the market, exit the market, and/or stay (if they’re already in it) in the short run?
• If the market supply curve is given by S2, then would we expect firms to enter the market, exit the market, and/or stay (if they’re already in it) in the short run?
• If the market supply curve is given by S3, then would we expect firms to enter the market, exit the market, and/or stay (if they’re already in it) in the short run?

Answer 1

1) Profit maximising level of output if supply curve is S1 = 4. where market price equals MC of firm.

2) If supply is S2 than output = 3. Market price is $15 which equals MC of firm.

3) In long run firms will enter the market because there is economic profit in the industry because average cost is lower than price.

4) At S2 supply curve firms will stay same because profits are normal.

5) At S3, firms will exit the market because ATC is higher than price.

6) At S1, in short run firms will stay same because they are earning economic profits.

7) At S2, in short run firms will stay same.

8) Ar S3 in short run firms will stay same because price is above AVC. If price becomes lower than AVC than firm will shut down in short run.

In short run firm will shut down only if price is lower than AVC

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