7. Short-run supply and long-run equilibrium

Consider the competitive market for rhodium. Assume that no matter how many firms operate in the industry, every firm is identical and faces the same marginal cost (MC), average total cost (ATC), and average variable cost (AVC) curves plotted in the following graph.

051015202530354045501009080706050403020100COSTS (Dollars per pound)QUANTITY (Thousands of pounds)MCATCAVC

The following graph plots the market demand curve for rhodium.

Use the orange points (square symbol) to plot the initial short-run industry supply curve when there are 10 firms in the market. (Hint: You can disregard the portion of the supply curve that corresponds to prices where there is no output since this is the industry supply curve.) Next, use the purple points (diamond symbol) to plot the short-run industry supply curve when there are 20 firms. Finally, use the green points (triangle symbol) to plot the short-run industry supply curve when there are 30 firms.

Supply (10 firms)Supply (20 firms)Supply (30 firms)01252503755006257508751000112512501009080706050403020100PRICE (Dollars per pound)QUANTITY (Thousands of pounds)Demand

If there were 20 firms in this market, the short-run equilibrium price of rhodium would be

per pound. At that price, firms in this industry would . Therefore, in the long run, firms would the rhodium market.

Because you know that competitive firms earn economic profit in the long run, you know the long-run equilibrium price must be

per pound. From the graph, you can see that this means there will be firms operating in the rhodium industry in long-run equilibrium.

True or False: Assuming implicit costs are positive, each of the firms operating in this industry in the long run earns positive accounting profit.

True

False