Question

5. 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. 100 T 90 80 70 60 50 40 ATC 30 20 AVC MC 5 10 15 20 25 30 35 40 45 50 QUANTITY (Thousands of pounds)
First drop down options are as followes: Shut down, Earn zero profit, Operate at a lost, Earn a positive profit.

Secound drop down: Enter, Exit, Neither enter nor exit.

Thrid drop down: Zero, Negative, Positive

Fourth drop down: 20, 30, 40

MC POINTS are as followed:

(10,10); (15,15); (20,30); (27,70); (30,90)

Answer 1

Supply curve is the same as the marginal cost curve of the firm above the shutdown point.

P	Qs (1 firm)	Qs (20 firms)	Qs (30 firms)	Qs (40 firms)
15	15	300	450	600
30	20	400	600	800
40	22	440	660	880
70	27	540	810	1080
90	30	600	900	1200

(All quantities are in thousands)

If there were 20 firms in this market, the short run equilibrium price of copper would be $ 40 per pound. At that price, firms in this industry would earn a positive profit (P > ATC). Therefore, in the long run, firms would enter the copper market.

Because you know that competitive firms earn zero economic profit in the long run, you know that long run equilibrium price must be $ 30 per pound. From the graph, you can see that this means there will be 30 firms operating in the copper industry in long run equilibrium.

80 Demand 70 50 Os (1o firms) -Qs (20 firms) Qs (30 firms) 30 20 10 0 200 400 600 800 1000 1200 Quantity (thousands of pounds)