9.4 Long-Run Decisions

Question 1

Define Entry and Exit for competitive market in the long-run

Answer 1

1-If existing firms are making positive economic profits, new firms have an incentive to enter the industry.
2-If existing firms are making zero profits, there are no incentives for new firms to enter, and no incentives for existing firms to exit.
3-If existing firms are making economic losses, there is an incentive for existing firms to exit the industry.

Question 2

explain the Effect of New Entrants Attracted by Positive Profits

Answer 2

1-Positive profits attract new firms
2-Entry leads to an increase in supply. The market supply curve shifts rightward and the price falls.
3-Entry stops when all firms are just covering their total costs and making 0 profits

Question 3

What is the Long-Run Equilibrium?

Answer 3

1-The long-run industry equilibrium of a competitive industry occurs when firms are earning zero profits
2-The price in the industry is the break-even price
3-The break-even price is the price at which a firm is just able to cover all of its costs, including the opportunity cost of capital
(In long-run competitive equilibrium, each firm is operating at the minimum point on its LRAC curve)

Question 4

What are the Conditions for Long-Run Equilibrium?

Answer 4

1-Existing firms must be maximizing profits, given their existing capital. Short-run marginal costs of production must be equal to market price
2-Existing firms must not be suffering losses.
3-Existing firms must not be earning profits
4-Existing firms must not be able to increase their profits by changing the size of their production facilities. Each firm must be the minimum point of its LRAC curve

Question 5

impact of Changes in Technology?

Answer 5

1-Expanding industry output
drives the price down to equal short-run average total cost of the new plants.
2-Plants with old technology may continue, but they will earn losses and eventually exit.