Question

The market for sand is in long-run equilibrium with three producers, two high cost and one low cost. The market price is equal to the minimum ATC of the two (identical) high cost producers. Suppose the variable cost curve for the low cost producer shifts down, when shipping costs fall from the nearby port. Is the claim, “the price of sand falls in the long run,” true, false, or uncertain? Explain with a diagram.

Answer 1

This claim is true. Variable cost refers to that expenses which change proportionately with the change in the output. The variable cost depends on the firms changes on of the economy changes. It also affects the inflation and deflation of the economy. When the variable cost curves for the low cost producers shift down that is the the maximum of the average variable cost functions start deteriorating. The market price then becomes less than the average variable cost. This occurs when the shipping cost decreases from the nearby port. When the price of sand was higher in a short run or initially then shipping cost was higher. Which led to the increase in the average variable cost. but when the prices of sand fell then the forms using the sun as variable factor their supply cost also decreased. But when the prices became for the more low then the average variable cost at that time the average variable cost curve shifts down for the low cost producer.