A perfectly competitive industry currently has 100 identical firms in the short run, each of which has fixed costs of $8 and average variable costs as follows: Quantity Average variable cost Marginal cost Average total cost Total cost N/A N/A N/A 1 5 5 6 11 a) Complete the above table by computing the total cost, marginal cost, and average total cost for each quantity from 1 to 6. Submit the completed table in your answer. b) Suppose the market equilibrium price is currently $15. How much will each firm produce in the short run? What is the aggregate supply in this market in the short run? c) The initial market equilibrium price is still $15, but we now consider what will happen in the long run, when firms can freely enter and exit the market. Suppose that all entrants have the same costs, and that these costs are as in the previous table. As this industry makes the transition from short run equilibrium to its long-run equilibrium, how will the new equilibrium price change? Will it increase or decrease? Will the quantity supplied by each firm change? Will it increase or decrease? Will there be any change on the demand side? 2. 3. 4.

A perfectly competitive industry currently has 100 identical firms in the short run, each of which has fixed costs of $8 and average variable costs as follows: Quantity Average variable cost Marginal cost Average total cost Total cost N/A N/A N/A 1 5 5 6 11 a) Complete the above table by computing the total cost, marginal cost, and average total cost for each quantity from 1 to 6. Submit the completed table in your answer. b) Suppose the market equilibrium price is currently $15. How much will each firm produce in the short run? What is the aggregate supply in this market in the short run? c) The initial market equilibrium price is still $15, but we now consider what will happen in the long run, when firms can freely enter and exit the market. Suppose that all entrants have the same costs, and that these costs are as in the previous table. As this industry makes the transition from short run equilibrium to its long-run equilibrium, how will the new equilibrium price change? Will it increase or decrease? Will the quantity supplied by each firm change? Will it increase or decrease? Will there be any change on the demand side? 2. 3. 4.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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In the long-run equilibrium of a competitive market with identical firms, what are the relationships among price (P), marginal cost (MC), and average total cost (ATC)?
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