Q3. Using the following exhibit explain why the long run price in this market will end up at $3.20. Average cost Marginal cost Average cost Marginal cost Marginal Cost/Marginal Revenue (9) Marginal Cost Marginal Reverie ($) Marginal revenue ONWARD Marginal ONWAL revenue Total cost Total revenue - Total cost 10 20 30 40 50 60 70 80 90 100 10 20 30 40 50 60 70 80 90 100 Quantity (flash drives) Quantity (flash drives) (a) Price Intersects marginal cost above the average cost curve. (b) Price Intersects marginal cost on the average cost curve. At a price of $4, price Is at a level where producing at the quantity At a price of $3.20, the price is now at a level where producing at the where P - MC leads to a price that is above average cost. In this quantity where P - MC leads to a price that Is equal to the average case, the firm is eating a profit. Total revenue is the quantity of cost. Total revenue is now a quantity of 70 times a price of $3.20. To 80 times the price of $4. or $320, shown by the overall shaded tal cost is the same: a quantity of 70 times an average cost of $3.20. box. Total cost is the quantity of BO times an average cost of $3.30, Zero profit is being earned in this situation. or $264, shown by the bottom shaded box. The leftover rectangle where total revenue exceeds total cost is the profit earned. Total Fixed Variable Marginal Average Marginal cost Quantity Cost Cost Cost Cost Cost Average cost O $62 $62 10 $90 $62 $28 $2.80 $9.00 20 $110 $62 $48 $2.00 $5.50 Marginal Cost Marginal Revenue () Loss OWNWADANOD for negathi 30 $126 $62 $1.60 $4.20 pront)- 40 $144 $62 $82 $1.80 $3.60 Marginal 50 $166 $62 $104 $2.20 $3.32 revenue 60 $192 $62 $130 $2.60 $3.20 - Total revenue 70 $224 $62 $162 $3.20 $3.20 10 20 30 40 50 60 70 80 90 100 BO $264 $62 $202 $4.00 $3.30 Quantity (flash drives) so $324 $62 $262 $6.00 $3.60 (c) Price Intersects marginal cost below the average cost curve. 100 $404 $62 $342 $B.OO $4.04 At a price of $2. 20. when the firm produces at a quantity where - MC. the price is below average cost. Here. the firm is suffering losses. Total costs are the large rectangle with a quantity of 50 and a price of $3.32, for total costs of $168. Total revenues are a quantity of 50 and a price of $2 20, or $110, shown by the smaller shaded box. The leftover rectangle on top thus shows the losses; that is, The amount that total cost exceeds total revenue