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Perfect Competition: Long Run

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Exhibit 2 depicts the market conditions experienced by representative firms in three different price-taker markets. Replicate the diagrams below and answer the following questions.

a. Which one of the conditions is true for a representative firm in the apple industry:
P>ATC, P<ATC or P=ATC? Is the firm earning economic profit, economic loss or normal rate of return in the Short Run? What would you expect to happen to the number of firms in this industry in the Long Run? Indicate in the diagram the profit-maximizing level of output and shade in the area corresponding to the firm's economic profit/loss, if any.
b. Which one of the conditions is true for a representative firm in the banana industry:
P>ATC, P<ATC or P=ATC? Is the firm earning economic profit, economic loss or normal rate of return in the Short Run? What would you expect to happen to the number of firms in this industry in the Long Run? Indicate in the diagram the profit-maximizing level of output and shade in the area corresponding to the firm's economic profit/loss, if any.
c. Which one of the conditions is true for a representative firm in the corn industry:
P>ATC, P<ATC or P=ATC? Is the firm earning economic profit, economic loss or normal rate of return in the Short Run? Will this firm stay in the market in the Short Run? In the Long Run? What would you expect to happen to the number of firms in this industry in the Long Run? Indicate in the diagram the profit-maximizing level of output and shade in the area corresponding to the firm's economic profit/loss, if any.

[Note: in Perfect Competition
a. Price Takers
Price Takers - face horizontal demand for their product
- Producers whose actions have no effect on the market price of the good he/she sells.
- Consumers whose actions have no effect on the market price of the good he/she buys.]
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Solution Summary

Assess price-taker markets.

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