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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

An industry currently has 100 firms, each of which has fixed cost of $16 and average variable cost as follows:

Quantity Average Variable Cost
1 $ 1
2 2
3 3
4 4
5 5
6 6

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.

Subpart (a):

To determine
Calculate the marginal cost, average total cost, variable cost and total cost.

Explanation

Table -1 shows the value of the average variable cost and the fixed cost is assumed as $16.

Table -1

Quantity Average variable cost
1 1
2 2
3 3
4 4
5 5
6 6

The variable cost can be calculated by using the following formula:

Variable cost=Average variable cost×Quantity (1)

Substitute the respective values in Equation (1) to calculate the variable cost.

Variable cost=1×1=1

Thus, the variable cost is $1.

Table -2 shows the value of the variable cost obtained by using Equation (1).

Table -2

Quantity Average variable cost Variable cost
1 1 1
2 2 4
3 3 9
4 4 16
5 5 25
6 6 36

The total cost can be calculated by using the following formula:

Total cost=Fixed cost+Variable cost (2)

Substitute the respective values in Equation (2) to calculate the total cost.

Total cost =16×1=17

Thus, the total cost is $17.

Table -3 shows the value of the total cost obtained by using Equation (2).

Table – 3

Quantity Average variable cost Variable cost Total cost
1 1 1 17
2 2 4 20
3 3 9 25
4 4 16 32
5 5 25 41
6 6 36 52

The marginal cost can be calculated by using the following formula:

Marginal cost=Change in total costChange in quantity (3)

Substitute the respective values in Equation (3) to calculate the marginal cost

Subpart (b):

To determine
Total supply in the market.

Subpart (c):

To determine
Long run profit.

Subpart (d):

To determine
Long run supply.

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