Microecomics HELP?!?!?!?

Question

The market for fertilizer is perfectly competitive. Firms in the market are producing output, but are currently making economic losses.

1. How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?

i. Price is ATC
ii. Price is AVC
iii. Price is MC

2. Draw two graphs, side by side, illustrating the present situation for the typical firm and in the market.




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.

1. Price of fertilizer will .

2. Marginal cost of fertilizer will .

3. Average total cost will .

4. The quantity supplied by each firm will .

5. The total quantity supplied to the market will .

Answer 1

Current Situation:

In the perfectly competitive market for fertilizer, firms are producing output but making economic losses. This means that the price is less than the average total cost (ATC), but the firms are still covering their average variable cost (AVC). As a result, firms continue operating in the short run even though they are not profitable.

1. How does the price of fertilizer compare to ATC, AVC, and MC?

1. Price compared to ATC: The price is less than the average total cost (P < ATC), which is why firms are experiencing economic losses.
2. Price compared to AVC: The price is greater than or equal to the average variable cost (P ≥ AVC), because firms are still producing. If the price were below AVC, firms would shut down immediately.
3. Price compared to MC: In a perfectly competitive market, firms produce at the quantity where the price equals marginal cost (P = MC).

Thus:

1. i. Price is less than ATC
2. ii. Price is greater than or equal to AVC
3. iii. Price is equal to MC

2. Graphical Illustration:

To illustrate this, we would typically draw two graphs: one for the individual firm and one for the overall market.

Firm's Graph:

1. The vertical axis represents costs or price.
2. The horizontal axis represents the quantity of output.
3. The ATC curve is above the price line, showing that the firm is making a loss. The AVC curve is below the price line, showing that the firm is covering its variable costs and continues to produce.
4. The MC curve intersects the price line, showing that the firm is producing where marginal cost equals the price (P = MC).

Market Graph:

1. The vertical axis represents the market price.
2. The horizontal axis represents the total quantity supplied in the market.
3. The current equilibrium price is determined by the intersection of the supply and demand curves.
4. At the current market price, firms are making losses, as illustrated in the firm’s graph.

Long-Run Adjustments:

In the long run, with no changes in demand or cost curves, firms will exit the market because they are incurring economic losses. As firms leave, the market supply curve will shift to the left (decreasing supply), causing the market price to rise. This adjustment will continue until the remaining firms are no longer making losses.

1. Price of fertilizer will: Increase.
2. As firms exit the market, the reduced supply will push the price up until the remaining firms are covering their total costs.
3. Marginal cost of fertilizer will: Stay the same.
4. In the long run, firms still produce at the point where the price equals the marginal cost (P = MC). Even though the price increases, the marginal cost will remain constant at the new, higher price level.
5. Average total cost will: Decrease.
6. Firms will adjust production to the point where their average total cost equals the new market price. In the long run, firms will be operating at their most efficient scale, where ATC is minimized.
7. The quantity supplied by each firm will: Increase.
8. As the price rises, each remaining firm will produce more, as the new equilibrium will allow them to cover all costs and potentially operate at a higher output level.
9. The total quantity supplied to the market will: Decrease.
10. Even though each firm may increase its output, the total number of firms in the market will decrease. Therefore, the total quantity supplied to the market will decline as some firms exit.

These changes reflect the typical adjustment process in a perfectly competitive market where firms are initially making losses but the market corrects itself in the long run to restore normal profits. Please let me know if you have further questions about this.

Cindy