Question

7. 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. 

Answer 1

Supply curve is the same as the marginal cost curve 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	22.5	450	675	900
70	27.5	550	825	1100
90	30	600	900	1200

If there were 30 firms in this market, the short run equilibrium price of copper would be $ 40 per pound. At that price, firms in this industry would make a profit (P > ATC). Therefore, in the long run, firms would enter the copper market.

100 90 Demand 80 70 60 Qs (40 firms) Qs (30 firms) Qs (20 firms) 4 50 40 30 20 10 0 200 400 600 800 1000 1200 1400 Quantity (thousands)

Because you know that competitive firms earn zero economic profit in the long run, you know the long run equilibrium price must be $ 30 per pound. From the graph, you can see that this means there will be 40 firms operating in the copper industry in long run equilibrium.

The statement is false. (Accounting profit would be positive as long run economic profit (which takes into account implicit costs) is zero)