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    Perfectly competitive firms are explicated.

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    A perfectly competitive firms earns zero economic profits in the long run due to the entry and exit of firms in the market.

    a. Solve for the level of output produced in the long run by a perfectly competitive firm and show graphically.

    b Provide second order conditions

    c. Demonstrate that profits are zero at this level of output

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    Solution Preview

    Recall that in a perfect competition, each individual firm has no market power to decide how to to sell. They must accept the market price, which is determined exogenously. We assume that the market price is P. We also assume that the firm has a cost function C(q).

    Revenue = PQ, so profit = PQ - C(Q).

    The first order condition, which we can use to find the maximum is d(profit)/dQ = P ...

    Solution Summary

    Perfectly competitive firms are explicated.