Long run dynamics of a perfectly competitive industry.
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I have attached the questions and graphs. Can you help me understand them. I'm getting confused on the profit, loss and zero economic profit. Also on when firm should enter of leave the market.
PART III: GRAPHICAL PROBLEMS
PROBLEM 3.
a. Determine whether the typical firms depicted below are earning profits or losses then show graphically how economic forces will cause the industry to move to a zero economic profit for the typical firm. Be sure your graph indicates whether firms will enter or leave the industry and shows how the equilibrium industry price and quantity are changed.
Note that there are two possible versions of the graph below, one of which will appear on the exam. In the graph below, the typical firms "A" and "B" are earning a profit. In the other graph, they will suffer losses.
In parts b through e below, answer in writing what you answered graphically above. Answers that address two or more possibilities will receive half credit if both answers are correct.
b) In the above graph, do new firms enter the industry or do existing firms leave the industry? What causes them to do so?
c) As the number of firms in the industry changes what happens to the industry supply curve? Why? [More or less firms or because each firm produces more or less at the new equilibrium price]
d) As the industry supply curve shifts, does price go up or down?
e) As the price changes, what happens to the profit or loss situation in the industry?
PROBLEM 4. Complete the graphs below:
a) Draw the line representing the profit-maximizing level of output, q*.
b) Label ATC at output level q*.
c) Draw and shade in, the profit or loss rectangle.
d) Label rectangles "profit" or "loss" or "Zero Economic Profit."
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Solution Summary
Given graphs depicting a perfectly competitive market I demonstrate the adjustments that occur as the market moves toward long run equilibrium.
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