Question

Consider the following information about a firm’s long-run total costs (assuming that other firms could produce at the same cost values):

qA	TC
0	0
100	2200
200	3600
300	5400
400	7600
500	10000

1. For each value of q_A (except when q_A = 0), provide the numerical value of the firm’s average total cost AC. Then, compare these AC values with the firm’s AVC (average variable cost) values at each value of q_A. For any given level of q_A, how are AC and AVC related? Why?
2. Suppose that the market price is P = 20. What is the firm’s profit-maximizing level of output q_A*? [P is the per-unit price at which A can sell its output.]
3. Will the firm operate or shut down if P = 20? Why?
4. Suppose that when P = 20 there are initially 1000 firms producing output. Compared to 1000, how many firms (i.e., 1000, more than 1000, less than 1000) will there be at long-run equilibrium? In answering this, provide the definition of long-run equilibrium.
5. What is the specific value, here, of the long-run equilibrium price?
6. Briefly explain (as precisely as possible) what the long-run market supply curve looks like, and why. What happens to the market price in the long-run if market demand rises?

Answer 1

T2 AC-AVC in donjeum 22 18 18 18 loo 2200 22 200 3600 300 syoo 400 76oo 19 500 10000 When - 20 then 2 2 24 20 6) A = 300 ble profit is max when Puma c) d) When P-20 then sim should operate in long lun. el pr min of AC When p=20, there will be more firins in long mun because at P=20, frim cams. pontive ew profit mer of AC penis = In long run, This peur = 18. Supply awwe is horizontal at P=18. un long