Please answer with full working and in a legible manner as I am using this to st
ID: 1154536 • Letter: P
Question
Please answer with full working and in a legible manner as I am using this to study for a test. Thanks so much
Q2. (10 marks) Suppose the figure below represents the (perfectly competitive) market for wheat in the short run in the economy of Grainland Firm Industry ice Per Tonne Price Per Tonne MC 240----.- ATC 210- 150 Quantity Tonnes) Quantity (Tonnes) 350 500 650 a) What is the current (short run) price for wheat and is the representative firm making a profit or loss and of what amount? Explain your answer. (3 marks) b) Over the long run, would there be entry or exit into this market? Determine how many firms will be in the market in the long run. Explain your answer. (3 marks) c) Explain what is meant by the shut down price' and what this implies for firms' profits. What is the shutdown price in this industry? Calculate the profit/loss that is being made at this point by firms stil in the industry. (4 marks)Explanation / Answer
a) Price = $ 150 (where industry demand = industry supply)
The firm is making a loss because when P = $ 150, Q = 5 tonnes (where P = MC)
P < ATC at this quantity.
Loss = (ATC - P) x Q = (210 - 150) x 5 = $ 300
b)
There would be exit of firms from this market (they would be making a loss) in the long run.
In the long run P = ATC (minimum) = $ 200 (supply curve of the industry would shift to the left, economic profit = 0 as P = ATC)
Industry output = 350 tonnes and individual firm's output = 7 tonnes (where P = MC = $ 200)
Number of firms = 350/7 = 50
c) Shutdown price (P = min AVC) is the price level below which the firm would not be able to recover its fixed costs and would want to stop production in the short run owing to the losses.
Shutdown price = min AVC = $ 110
Loss = fixed cost = (ATC - AVC) x Q = (240 - 110) x 3 = $ 390