ECO302 Chp 8 HW Solutions

ECO302 Chp 8 HW Solutions - Chapter 8 1 Draw a simple...

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Chapter 8 1. Draw a simple graph (or graphs) showing why the long-run supply curve in a competitive industry is horizontal. Explain. In the long run, many firms enter the industry and profits become zero. In addition, each firm must adopt the most efficient technology and operate at the bottom of the average cost curve, making the long-term supply curve a horizontal line. See figure 8.6 on page 8.6 2. Why does the marginal cost curve represent the supply curve for a competitive firm, but only above average variable cost? In the short-run, firms shut down if price is less than average variable costs; therefore, they will only supply output above average variable cost. 3. Why do competitive firms sometimes continue to operate even though they are operating at a loss? Draw a graph showing this situation and explain why the firm is better off continuing to produce output. If the firm shuts down, its loss will be equal to fix costs, or A+B. If the firm continues to operate, its loss is equal to A. Although it’s still operating at a loss,
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