Question

In: Economics

Consider the competitive market for dress shirts. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.

 6. Deriving the short-run supply curve

 Consider the competitive market for dress shirts. The following graph shows the marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves for a typical firm in the industry.

image.png

 For each price in the following table, use the graph to determine the number of shirts this firm would produce in order to maximize its profit. Assume that when the price is exactly equal to the average variable cost, the firm is indifferent between producing zero shirts and the profit-maximizing quantity. Also, indicate whether the firm will produce, shut down, or be indifferent between the two in the short run. Lastly, determine whether it will make a profit, suffer a loss, or break even at each price.

image.png


 On the following graph, use the orange points (square symbol) to plot points along the portion of the firm's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.)

image.png

 Suppose there are 9 firms in this industry, each of which has the cost curves previously shown.

 On the following graph, use the orange points (square symbol) to plot points along the portion of the industry's short-run supply curve that corresponds to prices where there is positive output. (Note: You are given more points to plot than you need.) Then, place the black point (plus symbol) on the graph to indicate the short-run equilibrium price and quantity in this market.

 Note: Dashed drop lines will automatically extend to both axes.

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 At the current short-run market price, firms will _______  in the short run. In the long run, _______ .


Solutions

Expert Solution

Price Quantity Produce Profit
4 24000 Shutdown Loss
8 32000 Shutdown Loss
12 36000 Produce or Shut down Loss
36 48000 Produce Break even
48 52000 Produce Profit
60 56000 Produce Profit
Price Quantity
8 32
12 36
36 48
48 52
60 56

Price Supply
8 288
12 324
36 432
48 468
60 504

The short-run supply is the rising portion of the MC curve above the minimum of the AVC curve.

Supply=short run supply * 9

Make an economic profit

Firms will enter the market


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