Question

Suppose the output (q) produced by different amounts of labour (L) hired by a firm is given below:
L 0 1 2 3 4 5 6
q 0 3 9 18 24 27 28
Assume that the short-run cost curves are drawn for the long-run efficient plant size and that all firms in the industry are identical. Are any of the market prices from part (d) a long-run equilibrium price? Explain.

Answer 1

Answer on Question #48539, Economics, Microeconomics

(d) If this firm operates in a perfectly competitive market and $\mathrm{P} = \$ 4.00$ per unit of output, the firm will produce the quantity, for which $\mathrm{MR} = \mathrm{MC} = \mathrm{P} = \$ 4$ , so $\mathrm{q} = 18$ units. If the market price is $\$ 12.00$ , for $\mathrm{MR} = \mathrm{MC} = \mathrm{P} = \$ 12$ $\mathrm{q} = 3$ units. If the market price is 36.00, for $\mathrm{MR} = \mathrm{MC} = \mathrm{P} = \$ 12$ $\mathrm{q} = 28$ units.

(e) In the long-run the profits are zero for perfectly competitive market.

Total profit TP = TR — TC = P*Q — TC

If $\mathrm{P} = \$ 4$ , $\mathrm{TP} = 4 * 18 - 300 = -228$ ;

If $\mathrm{P} = \$ 12$ , $\mathrm{TP} = 12 * 27 - 372 = -48$ ;

If $\mathrm{P} = \$ 36$ , $\mathrm{TP} = 36 * 28 - 408 = 600$ .

So, no of the market prices from part (d) are long-run equilibrium prices.

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