The market for fertilizer is perfectly competitive. Firms in the market are producing output, but they are currently making economic losses.
a. How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?
I would think that average total cost and the average variable cost would be greater than the price of fertilizer. The marginal cost would be equal to the price of fertilizer. Is this correct?
c. Assuming there is no change in demand or the firms' cost curves, explain what will happen in the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied by each firm, and the total quantity supplied to the market.
1 answer
In the long run, the price of fertilizer will decrease, the marginal cost will decrease, the average total cost will decrease, the quantity supplied by each firm will decrease, and the total quantity supplied to the market will decrease. This is because firms will exit the market due to the economic losses they are making, leading to a decrease in the supply of fertilizer.
1 answer