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An industry currently has 100 firms, all of which have fixed costs of $16 and avg. variable cost as follows:

Q Avg. Variable Cost ($)
1 1
2 2
3 3
4 4
5 5
6 6

a. Compute marginal cost and avg. total cost.

b. the price is $10. what is the total quantity supplied in the market?

c. 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?

d. graph the long-run supply curve for this market

I don't know how to do it at all..I'd appreciate any help! Thanks!! =)

a) First construct total variable cost for each level Q -- simply multiply Q by AVC. So

Q TVC
1 1
2 4
3 9
4 16
5 25
6 36

Now calculate marginal cost as the change in TVC for each level Q.
Q MC
1 1
2 3
3 5
4 7
5 9
6 11

b) with price = 10, firm will produce 5 but not 6 units.

c) calculate total profits at Q=5. Total revenue is $50, total costs is $25+$16 = $41. Since there are profits to be made, more firms will enter, shifting the supply curve out, Price will fall, quantity goes up. Each firm will supply the same or less as price falls.

d) draw a demand curve and supply curve that has an equilibrium price under 10, equilibrium quantity over 500. Now draw a U-shaped Industry-wide Total Average Cost curve with the very bottom of the curve touching the point where supply crosses demand.

Oh, I see how it all connects now. Thank you so much!

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5 answers
  1. A) I am confused, isnt it asking for average total cost, not TVC?

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  2. also confused. TVC?

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  3. Why each firm decide to produce 5 units at the price 10..???

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  4. Because firms are willing to produce where MR >MC but at optimal

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  5. Thank you so much, very helpful

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