The market for fertilizer is perfectly competitive. Firms in the market are prod
ID: 1219150 • Letter: T
Question
The market for fertilizer is perfectly competitive. Firms in the market are producing output but are currently making economic losses.
The price of fertilizer must be ________ (less than, greater than, equal to) than average total cost, _________ (less than, greater than, equal to) average variable cost, and _______ (less than, greater than, equal to) marginal cost.
Assuming there is no change in either demand or the firms’ cost curves, complete the following table by indicating what will happen to each of the following elements as the market transitions to the long run:
Increase or Decrease Price of fertilizer Marginal cost Average total cost Quantity supplied by each firm Market quantity suppliedExplanation / Answer
1. Less than.
When the price is less than the cost, the revenue earned (price times quantity) would fall short of the cost, thereby incurring a loss.
2. Greater than.
If the competitive firm is incurring a loss but still operating implies that its price or revenue is able to cover its AVC which allows it to operate than to shut down.
3. Equal to.
A competitive firm charges a firm equal to its marginal cost.
4. Price would increase.
This is because in the transition to long run, few firms would exit the industry due to loss, driving the prices of fertilizers up.
5. Increase in MC.
As stated, P = MC under perfect competition. So an increase in price would drive MC up.
6. ATC would fall.
Economies of scale would be generated due to which ATC would fall.
7. Increase in supply of eachfirm.
As the prices are up when few firms leave the industry, quantity supplied would rise.
8. Increase in market supply.
When the supply of each firm increases, the market supply, which is the summation of the each firm in the industry would also rise.
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