7. Short-run supply and long-run equilibrium Consider the competitive market for titanium. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph. The following diagram shows the market demand for titanium. Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 15 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 20 firms. If there were 20 firms in this market, the short-run equilibrium price of titanium would be per pound. At that price, firms in this industry would . Therefore, in the long run, firms would the titanium market. Because you know that competitive firms earn economic profit in the long run, you know the long-run equilibrium price must be per pound. From the graph, you can see that this means there will be firms operating in the titanium industry in long-run equilibrium. True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns positive accounting profit. True False

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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7. Short-run supply and long-run equilibrium

Consider the competitive market for titanium. Assume that, regardless of how many firms are in the industry, every firm in the industry is identical and faces the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves shown on the following graph.

The following diagram shows the market demand for titanium.

Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 15 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 20 firms.

If there were 20 firms in this market, the short-run equilibrium price of titanium would be

per pound. At that price, firms in this industry would . Therefore, in the long run, firms would the titanium market.

Because you know that competitive firms earn economic profit in the long run, you know the long-run equilibrium price must be

per pound. From the graph, you can see that this means there will be firms operating in the titanium industry in long-run equilibrium.

True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns positive accounting profit.

True

False

100
90
80
70
60
50
40
ATC
30
20
AVC
10
MC
10
20
30
40
50
60
70
80
90
100
QUANTITY (Thousands of pounds)
COSTS (Dollars per pound)

100
90
Supply (10 firms)
80
70
60
Supply (15 firms)
50
40
Supply (20 firms)
Demand
30
20
10
125
250
375
500
625
750
875
1000 1125 1250
QUANTITY (Thousands of pounds)
PRICE (Dollars per pound)

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