Suppose a competitive market consists of identical firms with a constant longrun marginal cost of $10. (There are no fixed costs in the long run.) Suppose the demand curve at any price, P, is given by Q = 1000 - P.

a) What are the price and quantity consumed in the long-run competitive equilibrium?

b) Suppose one new firm enters that is different from the existing firms. The new firm has a constant marginal cost of $9 and no fixed costs but can only produce 10 units (or fewer). What are the price and the quantity consumed in the long-run competitive equilibrium? Are these the same as in (a)? Explain

c) Are positive economic profits inconsistent with a long-run competitive equilibrium?

d) Identify the marginal cost of the last unit sold in (b). Is it $10 or $9? That is, if demand fell by 1 unit, would the new entrant or the other firms reduce output?

e) How much profit do the less efficient firms in (b) earn?

f) In the long-run competitive equilibrium, must the profit of the marginal entrant (the next firm to enter the market if demand expands or, alternativiely, the next firm to leave the market if demand contacts ) be zero?

Answer rating: 100% (QA)

a Price 10 Quantity 1000 10 990 In the longrun firms will be operating at their minimum efficient scale and so their marginal cost will be equal to th... View the full answer