Q10 An industry currently has 100 firms, each of which has fixed cost of $16 and average variable cost as follows: Quantity: 1, 2, 3, 4, 5, 6 Average variable cost: $1, 2, 3, 4, 5, 6 a) Compute a firm's marginal cost and average total cost for each quantity from 1 to 6. b) The equilibrium price is currently $10.How much does each firm produce? What is the total quantity supplied in the market? c) In the long run, firms can enter and exit the market, and all entrants have the same costs as above. As this market makes the transition to its long-run equilibrium,will the price rise or fall? Will the quantity demanded rise or fall? Will the quantity supplied by each firm rise or fall? Explain your answers. d) Graph the long-run supply curve for this market, with specific numbers on the axes as relevant.

a) Marginal cost (MC) is the cost of producing one more unit of a good. In this case, since the average variable cost (AVC) is increasing by $1 for each additional unit produced, the MC is also$1, $2,$3, $4,$5, and $6 for each respective unit.

Average total cost (ATC) is the sum of the average variable cost and average fixed cost (AFC). The AFC is the fixed cost divided by the quantity, which is $16 for each firm. So, the ATC for each quantity from 1 to 6 is:

ATC at Q=1: $1 (AVC) +$16 (AFC) = $17 ATC at Q=2:$2 (AVC) + $8 (AFC) =$10 ATC at Q=3: $3 (AVC) +$5.33 (AFC) = $8.33 ATC at Q=4:$4 (AVC) + $4 (AFC) =$8 ATC at Q=5: $5 (AVC) +$3.2 (AFC) = $8.2 ATC at Q=6:$6 (AVC) + $2.67 (AFC) =$8.67

b) Each firm will produce where the price equals the marginal cost. Since the equilibrium price is $10, and the MC is less than$10 for quantities 1 to 4, each firm will produce 4 units. The total quantity supplied in the market is 4 units per firm times 100 firms, or 400 units.

c) In the long run, if firms are making profits, new firms will enter the market, increasing supply and driving down the price. If firms are making losses, some firms will exit the market, decreasing supply and driving up the price. In this case, since the price is above the minimum ATC, firms are making profits, so new firms will enter the market. This will increase the quantity supplied and decrease the price. The quantity demanded will increase as the price decreases. The quantity supplied by each firm will decrease as new firms enter the market and the market supply increases.

d) The long-run supply curve in a perfectly competitive market is horizontal at the minimum point of the average total cost curve. In this case, the minimum ATC is $8 (at Q=4), so the long-run supply curve is a horizontal line at P=$8. The quantity on the x-axis will depend on the number of firms in the market, which we cannot determine without more information.