3. An industry currently has 100 firms, all of which have fixed costs of $16 and average variable cost as follows:
Quantity Average Variable Cost
1 $1
2 2
3 3
4 4
5 5
6 6
1) The price is currently $10. What is the total quantity supplied in this market? 10
2) As this market makes the transition to its long-run equilibrium, will the price rise or fall? Price will fall. Will the quantity supplied by each firm rise or fall? Rise.
3) Graph the long-run supply curve for this market.
To graph the long-run supply curve for this market, we need to find the point where all firms in the industry are making zero economic profit. In the long run, firms are able to adjust their production levels, and new firms can enter the market or existing firms can exit.
To determine the quantity supplied by each firm in the long run, we need to compare the price with the firm's average variable cost. If the price is higher than the average variable cost, the firm will continue to operate. If the price is lower than the average variable cost, the firm will shut down.
Let's calculate the average total cost (ATC) for each quantity level using the information provided. The ATC is the sum of fixed costs and average variable costs ($16 + average variable cost):
Quantity Average Variable Cost ATC
1 1 17
2 2 18
3 3 19
4 4 20
5 5 21
6 6 22
Now, let's determine whether firms will shut down or continue to operate at a price of $10. Comparing the price with the ATC, we can see that for quantities 1 to 4, the price is lower than the ATC. Thus, at a price of $10, all firms will shut down.
Therefore, the total quantity supplied in this market at a price of $10 is 0.
Now, let's address the next question regarding the long-run equilibrium and the behavior of price and quantity supplied.
In the long run, firms will exit the market if they are making losses and new firms will enter if there are profits to be made. As all firms in this industry are making losses, some firms will exit, reducing the industry supply.
The exit of firms will shift the supply curve to the left, which will lead to a decrease in the price. This is because the decrease in supply will result in a reduction in the quantity supplied, while the demand remains constant. Therefore, the price will fall in the long-run equilibrium.
However, as firms exit the market and supply decreases, the quantity supplied by each remaining firm will actually rise. The firms that continue to operate will have a larger market share, resulting in increased quantity supplied by each firm.
Now let's graph the long-run supply curve for this market. Since the long-run supply curve represents the quantities supplied at different prices in the long run, we can ignore the quantities where firms shut down (quantities 1 to 4 at a price of $10). For the long-run supply curve, we will only consider the quantities where firms continue to operate.
Quantity Price
5 $10
6 $10
Now, we can plot these points on a graph where the quantity is on the x-axis and the price is on the y-axis. Connect the points to form the long-run supply curve, which is a horizontal line at a price of $10 for quantities 5 and above.
Note: The long-run supply curve may vary depending on the assumption of firms' behavior and the market conditions. The explanation and graph provided here are based on the assumption that firms will shut down if the price is lower than the average variable cost.
To graph the long-run supply curve for this market, we need to consider the relationship between price and quantity supplied by all firms in the long-run equilibrium. In the long-run, firms can enter or exit the industry, so the number of firms is not fixed.
To determine the quantity supplied at different prices in the long-run, we need to find the minimum efficient scale (MES) for each firm. MES is the level of output at which average cost is minimized.
Given the average variable costs for each quantity, we can calculate the average total cost (ATC) by adding fixed costs ($16) to the average variable costs.
Quantity Average Variable Cost ATC
1 $1 $17
2 2 $18
3 3 $19
4 4 $20
5 5 $21
6 6 $22
To find the minimum efficient scale (MES), we need to identify the quantity at which the average total cost (ATC) is minimized. In this case, the minimum ATC is $17, which occurs at a quantity of 1.
Now, we can determine the long-run supply curve by plotting the points where the quantity supplied by each firm increases. Since each firm's supply curve starts at the MES level, the long-run supply curve will start at a price of $17 and a quantity supplied of 100 (since there are 100 firms).
As the price decreases, more firms will enter the market and increase their quantity supplied. This will cause the total quantity supplied in the market to increase. The long-run supply curve will slope upwards because each firm will continue to enter the market until the price is equal to their minimum average total cost (MES).
Therefore, the long-run supply curve for this market would start at a price of $17 and a quantity supplied of 100, and slope upwards as the price decreases.
Please note that without specific values for the average variable costs beyond 6 units, we cannot accurately plot the exact shape of the long-run supply curve beyond the provided data.