Suppose that there are 50 identical firms in a perfectly competitive industry. T

Question

Suppose that there are 50 identical firms in a perfectly competitive industry. The minimum average total cost for each firm in this industry is $100, which is reached at an output of 150 units. Currently, the market price is $120, and each firm is producing 200 units of output.

- In the short run, the quantity supplied by the industry is ___

- In the long run,  (firms will enter / firms will exit / the number of firms will stay the same) until the market price  ( rises above $200 / falls to $150 / remains the same / falls to $100 ) , and each firm in the industry produces ___ units.

-Thus, the long-run supply curve is:

an upward-sloping line starting at $150.

a horizontal line starting at $100.

an upward-sloping line starting at $100.

a horizontal line starting at $150.

Explanation / Answer

In short-run, there are 50 firms in the industry. Currently, each firm is producing 200 units of output.

So,

In the short-run, the quantity supplied by the industry is (200 * 50) 10,000 units.

Long-run equilibrium is attained where price and minimum average total cost are equal.

Currently, price is greater than the minimum average total cost. This means firms are earning economic profit. This will lead to entry of new firms in the industry.

So,

In the long-run, firms will enter until the market price falls to $150, and each firm in the industry produces 150 units.

Thus, the long-run supply curve is a horizontal line starting at $150.

Hence, the correct answer is the option (4).

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