Answered: The graph below shows cost curves for a…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

The graph below shows cost curves for a typical firm operating in a perfectly competitive market. Curve 1 represents Marginal Cost (MC), Curve 2 represents Average Variable Costs (AVC) and Curve 3 represents Average Total Costs (ATC).

Suppose that the equilibrium price is $12. What will happen in this market in the long run?

a. No new entry/no exit.

b.Existing firms will exit.

c.New firms will enter.

Price of Oranges ($)
21
20
19
18
17
16
15
14
13
12
11
10
9
8
96
7
5
4
325
2
1
O
0
Curve 3
1
Curve 1
Curve 2
2
3
4
5
Quantity of Oranges
LO
7
8

Definition Video Definition Point where the demand and supply curves intersect. At the equilibrium price the quantity supplied of a good is equal to the quantity demanded. When the market is not in equilibrium, market surplus or market shortage occurs. The region that is above the price equilibrium indicates market surplus and the region below the price equilibrium indicates market shortage. Video

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