The plastic bottle has only 10 producers, and the industry has to paid a fixed cost...

The plastic bottle has only 10 producers, and the industry has to paid a fixed cost of $25 per each producers. So, it is suggested that the short run industry supply will decreases when the fixes cost increased to $30.

Do you agree with this statement? Why?

Solutions

Expert Solution

No, I do not agree with the statement.

Any change in fixed cost has no effect on the short-run supply of the firm and thus industry at large. In case the Fixed Cost of the industry increases, it would cause the Average Fixed Cost (AFC) and the Average Total Cost (ATC) to rise and leave the Average Variable Cost (AVC) and thus the Marginal Cost(MC) unchanged.

The Equilibrium Condition being MR=MC (also MC curve being the supply curve of the firm in short run), there will be no change in the short run equilibrium of the firm. Given this the total production of the industry will also remain the same in short run.

Only in the long run, such a rise in Fixed cost can effect the firm/s if it/they are operating in long run equilibrium(i.e. earning just normal profits). In such case such firm/s will now not cover its higher Total Average Cost (TAC) and will go out of business in long run.In such case, Long Run Market Supply Curve of the Industry will slope upward to the left and at new equilibrium output will be lower and price higher. Also, there will be lesser number of firms in the market.

All in all we can conclude that the increase of Fixed cost on industry from $25 to $30 will have no effect on the individual firm's and thus industry's supply in the short run. Its only in Long run that such an impact can arise.

Rahul Sunny answered 2 years ago

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