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Firms in Competitive Markets

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

(a) How does the price of fertilizer compare to the average total cost, the average variable cost, and the marginal cost of producing fertilizer?

(b) Draw two graphs, side by side, illustrating the present situation for the typical firm and the market.

(c) Assuming there is no change in demand or the firms' cost curves, explain what will happen in the long run price of fertilizer, marginal cost, average total cost, and the total quantity supplied to the market.

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We know that a firm will always produce til the point where MC = P.

If the firm is making a loss, then we know that its average total cost (or simply referred to as average cost) is greater than its marginal cost. Hence AC (or ATC) > MC = P => AC > P.

The average variable cost ...

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Firms in Competitive Markets