Question

Vild is lile pi UIL-IlldX1121118 yudlilily UI Uutput IUI HAAVVdlelleil CUITIPdlly. IS lielildl kel llI IUIlg-Tuileyului IUIII! Why or why not? PROBLEM 2 Assume perfect competition exists for Good G, and assume the market is in long run equilibrium. Depict the market for good G, and indicate initial supply, demand, equilibrium price and quantity with subscript 1. To the right of the market, depict the long run equilibrium situation for firm j that is one firm that produces good G depicting all firm curves with subscript 1. Return to the market for good G, and illustrate the short-run effect if there is an increase in material costs to produce good G; depict all changes with subscript 2. What is the profit situation of firmi? Return again to the market for good G, and illustrate movement back to long run equilibrium both in the market for good G and for firm j. What is the profit situation of firmj? PROBLEM 3

Answer 1

Competitive market is a market in which there are many firms and product is similar, all firms are price takers and there is free entry and exit for any firm.

This market in the long run only has normal profit. In the short run it may have a abnormal profit or a loss but it achieves the normal profit in the long run.

Profit is maximised when marginal cost= marginal revenue and firm charge that price.

Let us look at the following figure.

Case 1: Firm j is having a abnormal profit as the price charged is P1 and average total cost in the market is ATC1 , then looking at this other firms will enter in the market and supply curve in the market will shift to right, it will decrease the prices and this firm will be forced to charge only P3 as a price which is equal to average total cost. Normal profit.

Case 2: Firm is having a loss as the price charged is P1 and average total cost in the market is ATC3, costs went up due to increase in material costs but as market is too competitive firms may nor raise prices immediately and will continue to produce as firms are able to cover variable costs atleast. Those firms which do not cover these costs willl be forced out, and supply curve in the market will shift to left, it will increase the prices and firms  will be charging P2 as a price which is equal to average total cost. Normal profit.

Hence in the short run a firm j may have loss or abnormal profit but in the long run it achieves only normal profit in the competitive markets.

АТС 3 АТ, Prie Pet AT(2 MAAR duantity

In monopoly, firm is a price maker and charges price above the average total cost and hence aims at abnormal profits.