At the long-run equilibrium output level: Now suppose that there is an increase
ID: 1094973 • Letter: A
Question
At the long-run equilibrium output level:
Now suppose that there is an increase in the demand for this product.
The diagram below shows the average total cost curve for a firm operating in a purely competitive, constant-cost industry. At the long-run equilibrium output level: What is this firms economic profit? What is this firms total revenue? What is the marginal cost of the last unit produced by the firm? Now suppose that there is an increase in the demand for this product. In the new long-run equilibrium, what happens to the total quantity supplied by the industry (increases, decreases, or stays the same)? 5. In the new long-run equilibrium, what happens to the total quantity supplied by this firm? (increases, decreases, or stays the same)?Explanation / Answer
1) In a competitive industry, the economic profits are zero in the long run. This is because firms operated at MR=AR=MC=AC.
2) The total revenus is the product of price and quantity. The firms producing at long run equilibrium quantity, 40, will earn a total revenue of 40*10= 400.
3) The marginal cost id equal to average cost at long run equilibrium. The marginal cost is 40.
If the demand increases there will be economic profits for some time. This iwll result in more number of firms. The equilibrium quantity will increase, the price and profits remaining the same.
- The quantity supplied by industry increases.
- The quantity supplied by each firm remains the same as more number of firms enter the market. The quantity supplied by ech firm is fixed in long run in constant cost market.
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