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    Calculating a competitive industry's long-run equilibrium

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    A firm in a purely competitive industry is currently producing 1200 units per day at a total cost of $600 . If the firm purchased 1000 units per day, its total cost would be $400, and if it produced 700 units per day, its total cost would be $375. What is the firms ATC per unit at these three levels of production? If every firm in this industry has the same cost structure, is the the industry in long-run competitive equilibrium? From what you know about these firms' cost structures, what is the highest possible price per unit that could exist as the market price in long-run equilibrium? If that price ends up being the market price and if the normal rate of profit is 10%, then how big will each firm's accounting profit per unit be?

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    Solution Preview

    Average Total Cost (ATC) = Total Cost (TC)/Quantity of output (Q)

    When Q = 1200, ATC = (600/1200=) $0.50
    When Q = 1000, ATC = (400/1000=) $0.40
    When Q = 700, ATC = (375/700=) $0.54

    In a perfectly competitive ...

    Solution Summary

    Given data on a typical firm's cost function, this solution shows how to calculate the market price for the industry in long-run equilibrium.

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