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Long-run perfectly competitive firms

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In long-run equilibrium a perfectly competitive firm will operate where the price is:

Select one:
a. greater than MR but equal to MC and minimum ATC
b. equal to MR, MC and minimum to ATC
c. greater than MC and minimum ATC, but equal to MR
d. greater than MR and MC, but equal to minimum ATC

For firms in perfectly competitive industries:

Select one:
a. Profit maximization occurs at Q where MR = ATC
b. Profit maximization occurs where TR attain a maximum
c. Profit maximization occurs at Q where P = MC
d. None of the above are true

Which of the following is NOT a characteristic of the perfectly competitive market structure:

Select one:
a. The product the firm produces is homogeneous or standardized
b. The firm can sell all it wants at the market clearing price
c. Consumers are assumed to have complete (perfect) information regarding the producers in the market
d. The firm may raise the price of the product it sells incurring small declines in sales

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Solution Preview

1. Answer is b. In the long run Price has to be equal to MR, and MC and the minimum of ATC.


For a perfectly competitive firm, Prices are given (firms cannot set prices), thus price is ...

Solution Summary

This solution shows the relationship between different cost functions and profit maximization in a perfectly competitive market

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Long-run Market Adjustment Under Perfect Competition

Firm Z, operating in a perfectly competitive market, can sell as much or as little as it wants of a good at a price of $16 per unit. Its cost function is C=50+4Q+2Q^2. The associated marginal cost is MC=4+4Q, and the point of minimum average cost is Qmin=5

(a). Determine the firm`s profit-maximizing level of output. Compute its profit.

(b). The industry demand curve is Q=200-5P. What is the total market demand at the current $16 price? If all firms in the industry have cost structures identical to that of firm Z, how many firms will supply the market?

(c). The outcomes in parts (a) and (b) cannot persist in the long run. Explain why. Find the market`s price, total output, number of firms, and output per firm in the long run.

(d) Comparing the short-run and long-run results, explain the changes in the price and in the number of firms.

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