Complete 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:
Option D, a horizontal line at a price of $3.50
Solution:
The estimated average industry unit rate for baseball caps is $2.50.
The estimated total aggregate expenditure is $3.50.
Both manufacturers use the same manufacturing equipment.
There is no limitation on the entrance and departure of companies in a dynamic sector in the long term. It allows future companies to exit the industry in the event of gains and current businesses to leave the business in the event of losses.
And this is why, in the long term, companies are running at nil economic income. Companies gain zero economic income when the price is equivalent to the lowest point of the typical overall cost curve.
And in the baseball cap segment, the supply curve over the long term would be a horizontal line at a price of $3.50. From this stage, companies would have nil economic income.
