Answer to Question #299128 in Microeconomics for Forest

Question

Assume the market for fertilizer is perfectly competitive. Firms in the market are producing output, but they are currently making economic losses.

 

a.How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?

 

b.Draw the two graphs, side by side, illustrating the present situation for the typical firm

and for the market.

 c.Assuming there is no change in demand or the firms’ cost curves, explain what will happen in the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied by each firm, and the total quantity supplied in the market.

Answer 1

a. The maximum profit is achieved in two cases:

a) when (TR) > (TC);

b) when marginal revenue (MR) = marginal cost (MC).

In this case MC > P

In order to understand which of the options is more suitable for a firm, it must compare the value of price (P) and average variable costs (AVC). Two cases are possible:

1. P>AVC: This means that the firm cannot cover total costs, but is able to spend on average variable costs and partially average fixed costs

2. P<AVC: In this case, average fixed costs are not covered at all, and variables are only partially covered.

b.

c.

Another difference between the short and long run is that the number of firms can change and the firm cannot be unprofitable, i.e. it must cover all costs, tk. it determines its prospects. Otherwise, the firm should leave the industry.