Question

Consider the competitive market for titanium. 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 above.

Use the orange points to plot the initial short run industry supply curve when there are 10 firms in the market. Next, use the purple points to plot the short run industry supply curve when there are 20 firms. Finally, use the green points to plot the short run industry supply curve when there are 30 firms.

Answer 1

In a competitive industry, a firm's marginal cost curve, except for the portion that falls below the AVC curve, is the firm's supply curve. Therefore, according to the given MC curve, an individual firm's shortrun supply schedule is as follows P-MC 20 36 24 30 32 34 38 52 72 There are three market scenari When there are 10 firms in the market, denote the market supplyas Qio When there are 20 firms in the market, denote the market supplyas Q20 When there are 30 firms in the market, denote the market supplyas Q30 1. 2. 3. From the individual supply schedule, we can find themarket supply schedule for the three market scenarios, as follows: P-MC 20 36 24 30 32 34 38 240 300 320 340 380 480 600 640 680 760 720 900 960 1020 1140 52 72

The market supply curves together with the demand curve are graphed below: 72 64 56 48 40 32 24 16 0 120 240 360 480 600 720 840 960 1080 1200 QUANTITY (Thousands of pounds) If there are 20 firms in this market, the short-Tun equilibriumprice of copper would be S52 per pound. As can pounds of copper. At this level of be seen in the table, at the price of $52, each firm will supply 34 thousand output, the figure shows that ATC is less than than $52, implying that the firms in the industry would make profit in the short run. Therefore, in the long run, firms wouldenter theindustry Because we know that competitivefirms earn zero economic profit in the longrun, we know the longrun equilibriumprice must equal the minimum ATC, which is $44 per pound. When price equals $44, each firm supplies 32 thousand pounds of outputand the quantity demanded in the market is 960 thousand units of output, which implies that 30 (-960/32) firms will operate in the industry in the long run. The given statement is false. In the long run, firms make zero economicprofit and positive accounting profit.