Suppose a competitive market consists of identical firms with a constant lon-run

Question

Suppose a competitive market consists of identical firms with a constant lon-run marginal cost of $10. (There are no fixed costs in the longrun) The demand curve is given by q=200-p

a) What are the price and quantity consumed in the longrun competitive equilibrium?

b) Suppose tha two new firms enter the market. Each new firm has a constant marginal cost of $7 and no fixed costs but can only produce 10 units (or fewer). What are the price, the quantity consumed, and the profits of old and new firms in the longrun competitive equilibrium?

c) Are positive economic profits inconsistent with the longrun competitive equilibrium explain?

Explanation / Answer

A) MC=P --> Q=200-P MC=10=P --> Q=200-10=190 B) In the long run, the old companies will restructure to become more competitive. They will copy whatever the new companies will do. Hence the MC for both old and new companies will be equal. MC=7=P Q=200-7=193 Profits for both new and old companies will be zero. C) According to economic theory, long run profits equal 0, because as long as profits exist, new companies are going to enter the market, introduce competition and drive down the prices until MC=P. If companies are experiencing losses, they will leave the market in the long run. This decreases supply and increases price until MC=P --> There are no positive profits in long run competitive equilibrium.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.