Question

1. Answer the following in your own words (a couple of sentences is fine).

(a) Explain in your own words why price equals marginal cost in perfectly competitive markets.

(b) If you draw out the long-run total cost function for a firm (with q on the horizontal axis, and $ on the vertical axis) it will go through the origin (the point (0, 0)), but this is not the case for the short-run cost function. Why?

(c) If you drew a firm’s short-run and long-run cost curves in the same graph, the short-run cost curve would always be above the long-run cost curve, except at one level of output. Why? What is special about this level of output?

Answer 1

A) (a) A firm in a perfectly price competituie taker selling market is a homogeneous number goods of sellers. with the infinite price is Marginal higher cast, than then it will not be able to product. sell the This also makes the demand curre perfectly elastic and price is equal to marginal cost in these markets. (b) This is because in the short nun, the firm has to incur some fixed cost of production as inputs. are both fixed and variable in the short nun. This fixed cost is there einen when no output is produced. dr the long run, all inputs are variable with no fixed cost of production. Thus, long run function cost passes through origin short inhereas run. cost function has an intercept. ca The point of minimum scale where efficient cost At this the is level, lowest. of production run cost of long to the is equal run cost short firm.