Question

1. Graph MC, AVC, and ATC for a firm with the costs indicated by the table to the right. Assuming Perfect Competition, what will happen in the short run if price is $12? What will happen in the long run?
2. What will happen in the short run if price is $25? What will happen in the long run? What is the Long Run equilibrium price?
3. indicated by the table to the right. Assuming Perfect Competition, what will happen in the short run if price is $12? What will happen in the long run?
4. What will happen in the short run if price is $25? What will happen in the long run? What is the Long Run equilibrium price?

Q	VC	TC	MC	AVC	ATC
0	0	30	-	-	-
1	8	38	$8	$8	$38
2	18	48	$10	$9	$24
3	30	60	$12	$10	$20
4	50	80	$20	$12.50	$20
5	80	110	$30	$16	$22

Answer 1

When the Price = $12, the profit-maximizing quantity is 3 units (Output at which MC = Price = $12)

At the profit-maximizing quantity of 3 units, ATC = $20 and AVC = $10. As the price is above the AVC in the short-run, the firm continues to produce in the short-run. However, as the price is below the ATC, the firm shuts down in the long-run. As some firms exit the industry, the supply decreases and the price of the good increases up to the minimum ATC i.e., $20

When the Price = $25, the profit-maximizing quantity is 4 units (The maximum output up to which the MC remains less than or equal to the price)

At the profit-maximizing quantity of 4 units, ATC = $20 and AVC = $12.50. As the price is above the ATC, the firm is earning a positive economic profit in the short-run. In the long-run, new firms enter the market and this increases the supply in the market. As a result, the price of the good decreases up to the minimum ATC i.e., $20

Long-run equilibrium price = $20