In the short run, there are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and each of them has the following cost structure: The long-run supply curve for this market is

Question

In the short run, there are 500 identical firms in a competitive market. The firms do not use any resources that are available in limited quantities, and each of them has the following cost structure:  The long-run supply curve for this market is

Quizplus · Accepted Answer

In the short run, each firm will produce at the output level where marginal cost equals marginal revenue, given the market price. With the given cost structure, this occurs at an output of 10. In the long run, firms have flexibility to adjust their inputs and therefore, their costs. If the market price is above the minimum average total cost (which is $5 in this case), firms will enter the market, increasing supply and driving down the price. As firms continue to enter, the market supply will increase, causing the price to settle at the minimum average total cost, which is where the long-run supply curve is horizontal. Therefore, the correct answer is B, which states that the long-run supply curve is horizontal at a price of $5.

In the Short Run, There Are 500 Identical Firms in a Competitive