Question

PART 1 Costs & Revenue Price MC The INDUSTRY is the price maker The SINGLE FIRM IS a price taker S ATC ARMR D Q Q Quantity Output Price Costs Revenue The INDUSTRY is the TSINGLES a proto MC pro NOIVAL proft in the US ATC AR-MR P1 AR-MR D Q01 Q10 Output a. What type of market structure is shown in the diagram above and how did you determine this? b. What are the firm's short run profit maximizing price and quantity? c. Why will that be the firm's long run equilibrium price and quantity everything else equal? Why? d. Why is this equilibrium defined as an economically efficient market equilibrium? e. Name an example of a firm that operates in a market of this type and explain how it qualifies as the market structure you identified.

Answer 1

a) Market structure is perfect competition because demand curve of firm in perfect competition is always parallel to horizontal axis and demand curve is also MR curve, AR curve and price line.

b) Short run profit maximisng quantity is Q1 and price is P1. Price and quantity is decided where MR =MC. and quantity is decided on horizontal axis ad price on vertical axis corresponding to the point where MR=MC.

c) Long run price and quantity is decided where minimum of ATC tangent to the MR or price line. In this diagram also minimum of ATC is tangent to the demand curve or MR curve. So this is the long run equilibrium for the firm. In long run firms in perfect competition earns only normal profit.

d) It is economically efficient because production is occuring at the minimum point of ATC or in other words total cost of production is minimum.

e) Corn firms or corn farmers are most approximate example of perfect competition because in perfect competition there is many buyers and sellers , selling the identical products. Corn produced by farmers are almost same. So corn industries could be said as perfect competition.

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