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. BO 72 54 ATC COSTS (Dollars per ton) 40 32 24 AVC 8 МСС 3 27 30 12 15 18 21 24 QUANTITY (Thousands of tons)

Answer 1

The individual firm's supply curve is nothing but the upward sloping portion of the MC curve. See the points on the upward sloping MC cruve. The number corresponding to x-axis will give you the quantity of a single firm and number corresponding to y-axis will give you the price. Then simply multiply the quantity that a single firm produces at a given price by the number of firms so as to get the industry supply.

Number of firms = 20 Industry supply = number of Quantity firms* quantity Price 16 240 300 40 12 15 16 17 18 52 64 320 340 80 360

Price 16 Number of firms = 40 Industry supply = Quantity number of firms* quantity 480 15 600 640 680 18 720 12 40 52 16 17 64 80

Number of firms = 60 Industry supply = Price Quantity number of firms* quantity 16 12 720 40 15 900 52 16 960 64 17 1020 80 18 1080

Now, plot the industry supply on x-axis and the price on y-axis in order to plot the industry supply as shown in figure given below.

? 80 72 84 Supply (20 firms) Demand Supply (40 firms) PRICE (Dollars per ton) 40 Supply (60 firms) 24 16 240 350 400 500 QUANTITY (Thousands of tons)

If there were 60 firms, equilibrium price = $40 (where the green supply curve and demand curve intersect). At this price, firms would suffer losses because firms is not able to cover all its total cost although it is covering variable costs. In the long run, firms would exit the market

Competitive firm earns zero economic profit in the long run, long-run equilibrium price should be $52 (because at this price the firm is able to cover total cost). This means that there will be 20 firms operating in steel industry in long-run equilibrium.

The statement is true.

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