Perfectly Competitive Firm and Industry In Long-Run Equilibrium

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Question

Answer the following questions:

1. Draw graphs showing a perfectly competitive firm and industry in long-run equilibrium.
a. How do you know that the industry is in long-run equilibrium?
b. Suppose that there is an increase in demand for this product. Show and explain the short-run adjustment process for both the firm and the industry.
c. Show and explain the long-run adjustment process for both the firm and the industry. What will happen to the number of firms in the new long-run equilibrium?

Solution Preview

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a) A single firm will produce at a quantity q where price = marginal cost. We assume the industry is made up of 1,000 identical firms so that q = 100,000 where supply equals demand. The industry is in long-run equilibrium because price is equal to minimum average total cost ($50) and the economic profits are zero....
Perfectly Competitive Firm and Industry In Long-Run Equilibrium

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