An industry currently has 100 firms, each of which has fixed cost of 6 and average variable cost

An industry currently has 100 firms, each of which has fixed...

An industry currently has 100 firms, each of which has fixed cost of \$16 and average variable cost as follows: a. Compute a firm's marginal cost and average total cost for each quantity from 1 to 6. b. The equilibrium price is currently $10. How much does each firm produce? What is the total quantity supplied in the market? c. In the long run, firms can enter and exit the market, and all entrants have the same costs as above. 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? Explain your answers. d. Graph the long-run supply curve for this market, with specific numbers on the axes as relevant.

An industry currently has 100 firms, each of which has fixed cost of \$16 and average variable cost as
follows:
a. Compute a firm's marginal cost and average total cost for each quantity from 1 to 6.
b. The equilibrium price is currently $10. How much does each firm produce? What is the total quantity supplied in the market?
c. In the long run, firms can enter and exit the market, and all entrants have the same costs as above.
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? Explain your answers.
d. Graph the long-run supply curve for this market, with specific numbers on the axes as
relevant.

Key Concepts

Fixed and Variable Costs

Fixed costs are expenses that remain constant regardless of the level of production, while variable costs change with output. Understanding these costs is essential because they determine how total costs are broken down, influence average total cost calculations, and affect firms’ production decisions in both the short run and long run.

Marginal Cost

Marginal cost is the additional cost incurred from producing one more unit of output. It plays a crucial role in decision making, as firms will increase production up to the point where the marginal cost of an additional unit equals the market price, ensuring profit maximization in competitive markets.

Average Total Cost (ATC)

Average total cost is calculated by dividing the sum of fixed and variable costs by the total quantity produced. It is significant for analyzing a firm's efficiency and profitability and is central to understanding how production scales with output, especially when comparing different levels of production in the short run and during the transition to long-run equilibrium.

Short-run Equilibrium

In the short-run, competitive market equilibrium is achieved when individual firms decide on their output level such that the market price equals marginal cost, considering their fixed costs. This concept explains how, given a fixed number of firms, the total market supply and price are determined based on individual firm production decisions.

Long-run Equilibrium

Long-run equilibrium occurs when firms can freely enter or exit the market, and all firms earn zero economic profit. This means that the market price settles at a level where it is equal to the minimum average total cost, leading to potential adjustments in the number of firms and individual production levels, thereby ensuring optimal resource allocation in the industry.

Market Supply Curve

The market supply curve represents the total quantity supplied by all firms at different price levels. In a competitive market, especially in the long run, this curve reflects the response of firms to market conditions, including adjustments due to entry and exit, and illustrates how changes in cost structures and technology can influence total industry output.

Transcript

00:02 So just from the three pieces of information, the quantity, the average variable cost, and then from the fixed cost, we can get a lot of other data.

00:13 So we start off with quantity 1 through 6, average variable cost, 1 through 6, and from that we can get the variable cost.

00:21 And that is simply just the quantity times the average variable cost.

00:26 So we fill that out.

00:27 1 times 1 is 1, 2 times 2 is 4, and so on all the way down to 6 times 6 is 30.

00:32 What about the total cost? that's just going to be the variable cost plus our fixed cost, and the problem told us that the fixed cost is 16.

00:41 So we simply add 16 to each of the variable costs, and that's our total cost.

00:46 How about the average total cost? that's just the total cost divided by quantity.

00:53 So we do each of those operations, 17 divided by 1, 20 divided by 2, 25 divided by 3, and so on.

01:00 How about for marginal cost? marginal cost is not specifically asked for in part a, but it's going to be very useful in the subsequent parts to this question.

01:09 So let's just get it out of the way now while we have the numbers in front of us.

01:13 How do we calculate marginal cost? marginal cost is simply the difference in total cost moving from one unit of production to the next.

01:22 So why do we start off with one here? why isn't it 17? because you have to remember that fixed cost, equals 16.

01:32 So when quantity equals zero, total cost equals 16.

01:39 Okay? so to go from a quantity of zero to a quantity one only increases total cost by one.

01:47 Therefore the marginal cost is one.

01:50 To go from a quantity of one to two, the difference in total cost goes from 17 to 20.

01:55 That's a difference of three.

01:57 So you see that's how we get each of the marginal cost.

01:59 So we we do that for the six units of production as well.

02:03 Okay.

02:05 For the second part, if the price is $10, how much is each firm going to produce? they're going to produce five.

02:10 Why? let's go back to the first part and look at marginal cost.

02:14 The firm will continue to produce until marginal cost is greater than marginal revenue.

02:20 And we see here at six units of production, the marginal cost is 11.

02:25 At that point, marginal cost is greater than marginal revenue, which is price.

02:30 So we stick with five units of production because the marginal cost is only nine...

Please give Ace some feedback