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 22 33 44 55 66 Compute a firm’s marginal cost and average total cost for each quantity from 1 to 6. The equilibrium price is currently $10. How much does each firm produce? What is the total quantity supplied in the market? 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. Graph the long-run supply curve for this market, with specific numbers on the axes as relevant.

The marginal cost is the change in the total cost that arises when the quantity produced is incremented, the cost of producing additional quantity.

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.

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