9. The market for fertilizer is perfectly competitive. Firms in the market are p
ID: 1252478 • Letter: 9
Question
9. The market for fertilizer is perfectly competitive. Firms in the market are producing output, bur are currently making economic losses.a. How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?
b. Draw two groups, side by side, illustrating the present situation for the typical firm and in the market.
c. Assuming there is no change in either demand or the firms’ cost curves, explain what will happen in the long run to the price of fertilizer, marginal cost, average total cost, the quantity supplied by each firm, and the total quantity supplied to the market.
Explanation / Answer
Let's take the information we have
Perfectly competitive, producing output, making economci losses
In a perfectly competitive market the price and quantitiy are determined where the demand curve crosses the marginal cost.
There are 4 situations
1) Demand crosses marginal cost above average total cost (ATC) = Economic Profit
2) Demand crosses marginal cost at ATC = No economic loss of gain
3)Demand crosses below ATC but above Average Variable Cost (AVC)= Economic loss but keep producing in the short run because you are loosing less money than not producing at all.
4) Demand curve crosses below AVC = Shut down immediatly.
With the given information above it looks like the demand curve is crossing marginal cost below ATC and above AVC. (This should help you answer A and B)
C. Assuming there is no change in demand than most firms will exit the market in the long run. This will drive the price up to marginal cost cure to at or above Average total cost. Each individual firm will supply more to the market because of less competition meeting demand and the total quantitiy supplied to the market will increase as well.
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