Question

Assume the market price is $10.

a. What is the firm’s short-run economic profit?

b. In the long run what do you expect to happen in this industry (entry or exit). Why.

c. How does this long run adjustment effect the market? What happens to equilibrium price and quantity?

d. How does this long run adjustment effect the firm? How do their profits change?

MC ATC 2 3 4 5 6 7 8 paris

Answer 1

A) Setting P=MC, the firm will produce Q = 5 units where ATC = 7 so Profits = (10-7)*5 = 15

B) In the long run, more firms will enter the market since it is earning positive economic profits

C) In the long run, the entry of new firms will increase the supply and decrease the price.

So, the Price falls until it is equal to the minimum ATC where Q = 3

D) When the price falls to the Minimum ATC, profits of the firm becomes zero as P=ATC