Suppose Marcy\'s Medical Machines operates in a perfectly competitive market and

Question

Suppose Marcy's Medical Machines operates in a perfectly competitive market and is producing its profit maximizing level of output. Suppose further that at this level of production, its average total cost is $2500, average variable cost is $2300, and marginal revenue is $2800.

1. In the situation above, Marcy's production of medical machines in the long run will be ______ it was i the short run, everything else held constant.

(greater than/less than/ same as)

2. Over time, in the above situation, the equilibrium price of medical machines will _______ everything else held constant. (increase/decrease/remain unchanged)

**please explain how you got your answer.. mostly interested in how to solve the problem

Explanation / Answer

Marcy operates in a perfectly competitive market and is producing its profit maximizing level of output. Given that the average total cost is $2500, average variable cost is $2300, and marginal revenue is $2800. Now if this is the profit maximizing level of output, then Marginal revenue (or price which, for a competitive firm, implies P = MR = AR), is equal to the marginal cost. This indicates that at this level, P ($2800) is greater than the ATC ($2500) So the firm is earning economic profits.

In the long run, there will be entry of new firms which will produce more output so that there will be an increase tin the the supply, supply shifts to the right and the price falls. Production per firm decreases. Another way to understand is that currently MC>AC, so in the long run, When long run MC = long run AC, production should be reduced in order to achieve the long run optimal output.

1. In the situation above, Marcy's production of medical machines in the long run will be ______ it was in the short run, everything else held constant. (less than)

2. Over time, in the above situation, the equilibrium price of medical machines will _______ everything else held constant. (decrease)

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