Below are graphs of a constant cost industry and a perfectly competitive firm wi
ID: 1193603 • Letter: B
Question
Below are graphs of a constant cost industry and a perfectly competitive firm within it. Initially, the industry is in long run equilibrium at point E*, then demand shifts from Demand1 to Demand2. Answer the three questions below (P = Price, MR = Marginal Revenue, AR = Average Revenue, MC = Marginal Cost, SRATC = Short Run Average Total Cost, LRAC = Long Run Average Total Cost). The demand shift results in Manipulate BOTH graphs to reflect the adjustments that yield the long run equilibrium. Long run equilibrium is restored in this industry when:Explanation / Answer
Q.1
Correct Answer:
A short run economic profit of the firm.
Explanation:
Shift in demand curve to the right will cause higher demand of the products but no. of sellers in perfect competition will be limited in short run. Thus, existing sellers will cater the demand and earn economic profit. Thus, a short run economic profit of the firm will take place. Though, in long term it will not happen and economic profit will be zero for firms.
Q. 3
Correct Answer
Short run economic profit attract resources. In the long run, firms enter the industry, reducing market price and driving economic profit to be zero. Long run equilibrium is restored when P=LRAC=SRATC=MC
Explanation:
Correct option is self-explanatory.
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