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## 10. Problems and Applications Q10

An industry currently has 100 firms, each of which has fixed costs of \$16 and average variable costs as follows:
Complete the following table by deriving the total cost, marginal cost, and average total cost for each quantity from 1 to 6.
Quantity
Average Variable Cost
Total Cost
Marginal Cost
Average Total Cost
(Dollars)
(Dollars)
(Dollars)
(Dollars)
0   16

1 1

2 2

3 3

4 4

5 5

6 6

The equilibrium price is currently \$10.
Each firm produces __________ units, so the total quantity supplied in the market is _________ units.

In the long run, firms can enter and exit the market, and all entrants have the same costs as in the previous table.
As this market makes the transition to its long-run equilibrium, the price will  _______  , quantity demanded will  ________  , and the quantity supplied by each firm will  _________  .

Use the orange line (square point) to graph the long-run supply curve for this market.

check_circle

Step 1

The completed table is given below.

Step 2

The firm will produce the quantity at which marginal cost is lower than or equal to the market price in the perfectly competitive competition. Each firm will produce 5 units of output because at this point market price (\$10) is greater than the marginal cost (MC) of producing the 5th unit. Thus at the equilibrium price, each firm produces 5 units and the total quantity supplied (Qs) is 500 units (5*100) by the 100 firms.

Step 3

In the long run, where firms are free to enter and exit in the market, the market price will fall leading to an increase in the quantity demanded and an increase in the quantity supplied by the firm. The reason behind the same is that firms will enter in the market i...

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