Question

Consider the market for baseball caps. There are many producers in this market, and we assume that the technology of production is identical among these producers. A typical producer in this market has a U-shaped average variable cost curve with the minimum average variable cost at $2.50, and a U-shaped average total cost curve with the minimum average total cost at $3.50. What does the market supply of baseball caps look like in the long run? Choose one: A. an upward-sloping curve that starts at the price of zero B. an upward-sloping curve that starts at the price of $3.50, with zero supply at a price less than $3.50 C. an upward-sloping curve that starts at the price of $2.50, with zero supply at a price less than $2.50 D. a horizontal line at a price of $3.50

Answer 1

Answer:

The correct answer is option D.

Explanation:

The minimum average variable cost in the market for baseball caps is $2.50.

The minimum average total cost is $3.50.

All the producers have identical production technology.

In a competitive market, in the long run, there is no restriction on entry and exit of firms. This causes potential firms to join the market in case of profits and existing firms to leave the market in case of loss.

That is why, the firms in the long run operate at zero economic profits. The firms earn zero economic profits when The price is equal to the minimum point of the average total cost curve.

So in the market for baseball caps, the supply curve in the long run will be a horizontal line at a price of $3.50. The firms will be having zero economic profits at this point.