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

True. Variable costs is the expense that change in proportion to production output. Variable cost varies depends on the changes in the firm or economy. It affects the inflation and defaltion in the economy. As the cost in the firm decreases it also affect the price which decreases the price. For a long run industry the firm is mostly affected by the variable cost. So whenever the the variable cost increases the price of product increases viceversa.Here it is the sand producer, he have the variable cost of shipping. It has reduced which means the variable cost reduces. So automatically it affects the price. So the price of sand falls in long run. I will explain this by daigram which shown below.Here the MC 1 and AC1 is the marginal cost and average cost of the producer. Marginal cost means the change in cost when the quantity produced increased by one unit. Average cost is the total cost divided by no of cost. It is the cost that a producers have initally. MC2 and AC2 is the marginal cost and average cost after the fall in variable cost. When the variable cost reduces the curve shifts towards downwards. Which is clearly shown in the figure. There will be no change in AR and MR which is Average revenue and Marginal revenue. It realtes to demand. The Y axis is the cost and Xaxis is the output . When there is fall in variable cost normally Price comes to P2 which is lower than P1. Also we can seen that the output increaes. It results the profit maximizaion.