Question

6. Short-run supply and long-run equilibrium Consider the competitive market for copper. 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. COSTS (Dollars per pound) NON 0 3 27 30 6 12 16 18 21 24 QUANTITY (Thousands of pounds) The following diagram shows the market demand for copper

Answer 1

MC - 120 240 360 450 500 720 840 960 1080 1200 for I firm fa 20 firm for 40 firas for 60 firm Ri Q2 Q3 12 x 20 - 240 12x40 = 480 12x60 = 720 15 - 300 600 900 320 640 960 18 360 720 40 2160 - Scanned with

Image description:

Upward sloping portion of the Marginal cost (above the point where it crosses average variable cost) symbolises the supply curve of the firm.

Notations are as follows:

S1: supply curve for 20 firms

S2: supply curve for 40 firms

S3: supply curve for 60 firms

Answers:

If there are 60 firms in this market, the short run price of copper would be 32$ as indicated by the graph. Since it is profitable to produce copper at that price, in the long run, firms would enter the market.

Since competitive firms earn positive economic profits in the long run, the long run equilibrium price must be $32 and there will be sixty firms operating in the long run in the copper industry.