1) Tell how they combine to insure that in the long run a firm in a perfectly co
ID: 1178084 • Letter: 1
Question
1) Tell how they combine to insure that in the long run a firm in a perfectly compitive industry make zero profit and is a price taker.
2) suppose each frim in perfectly competitive broccli industry has a long run total cost curve given (1/150)Q^3-0.49Q^2 + 89
a) without knowly the demand function can we say how much broccoli each firm produces in long run equilibrium? if so under which assumption. if not explain why?
b) if demand is given by Q= -400p + 16002, what is the long run equilibrium price, quantity in market? how many firm will there be?
Explanation / Answer
Before getting down the answer i would like to differentiate between the profit defined in economics v profit in accounting.
The profit in economics is calculated after we take the enterprenuer or owners into the account. we also count their opportunity cost in the costs.
Whereas in accounting we onnly consider the monetary costs.
So even when the economic profit is zero the accounting profit can be greater tha zero
Let us consider a scenario in which in a perfectly competetive market, firms are making a profit (in economic terms super normal profit), this would lure other copanies to enter the market. This would increase the supply and would bring down the prices. This would continue till economic profit is zero.
If the firms are making a loss then some of the firms would exit the market and the supply would decrease and the prices will till the compannies no make a loss.
2)
In the long run the firms upply that much amount at which the Average total cost is minimum.
This will also be the price of the good.
This is because if the price i higher the compnies will be making a profit and the situation explained in 1 will take place.
If the demand at the price at which Average Total Cost is minimum is zero then the firm would make loss and would instead shut down.
The quantity produced by each firm is 11.73
This can be found by differentiating the average total cost function
The price in long run would be the minimum of total average total cost which is 14.25
the quantity demanded at this price is 10300.
thus the number of firms is 878
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