Answer to Question #281885 in Microeconomics for bestie

Question

The mango float industry currently has 100 firms, each of which has fixed cost of USD 16 and average variable cost as follows:

Quantity                Average Variable Cost

1                              USD 1

2                              2

3                              3

4                              4

5                              5

6                              6

1. Compute a firm’s marginal cost and average total cost for each quantity from 1 to 6.
2. The equilibrium price is currently USD 10. How much does each firm produce? What is the total quantity supplied in the market?
3. 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.
4. Graph the long-run supply curve for this market, with specific numbers on the axes as relevant.

Answer 1

1.

Q AVC AFC ATC MC

1 1 16 17 -

2 2 8 10 3

3 3 5.33 8.33 5

4 4 4 8 7

5 5 3.2 8.2 9

6 6 2.67 8.67 11

2. If P = 10, then each firm will produce at P = MC, so Q = 5 units.

The total quantity supplied in the market is 5×100 = 500 units.

3. As P > ATC (10 > 8.2) at the profit-maximizing level, then in the long run more firms will enter the market, the price will decrease, the total quantity supplied increase with no change in individual supply until P = ATC.

4. The long-run supply curve is an upper part of MC curve.