10. An industry currently has 100 firms, all of which have fixed cost of $16 and average variable cost as follows:

Question

Quantity / Average variable cost: (1/$1),(2,$2), (3,$3), (4,$4), (5,$5), and (6,$6)

b. The price is currently $10. What is the total quantity supplied in the market?

I think that it is zero because the currently price does meet no exceed the average total cost, which is for the quantity 1, $17. Is this correct.

c. As this market makes the transition to its long-run equilibrium, will the price rise or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall?

I believe that the marginal cost would be (quantity/marginal cost): (1/NA),(2,$19), (3,$21), (4,$23), (5,$25), and (6,$27)is this correct?

Use your first principals of microeconomics; firms will produce where MC=MR. So, first construct your MC function. Calculate Total variable costs at each level of production. At Q=1 and AVC=1, Total cost is 1. At Q=2 and AVC=2, total cost is 4. and so on.

So, Q/TVC becomes (1,1),(2,4),(3,9),(4,16),(5,25),(6,36). Now determine marginal costs (Q/MC) becomes (1/na)(2,3)(3,5),(4,7),(5,9),(6,11).

So, if the price is $10, in the short run, each firm will produce 5 units. Total revenue becomes 5*$10=$50. Total costs becomes 25+16=$41. Total quantity supplied becomes 5*100=500.

In the long run, other firms will see the profit potential so, firms will go up, quantity supplied goes up, price goes down, and each firm produces the same or less.

Thank you for the information.

Answer 1

That is correct. In the long run, the price will fall and the quantity demanded will rise. The quantity supplied by each firm will fall as more firms enter the market and the price decreases.