Chapter 10

Question 1

PROFIT MAXIMIZATION IN THE LONG RUN
Three assumptions:

Answer 1

– Easy entry and exit only
– The only long run adjustment we consider
– Identical costs
– All firms in the industry have identical costs
– Constant-cost industry
– Entry and exit do not affect resource prices

Question 2

After all long-run adjustments in a perfectly competitive industry:

Answer 2

– Price will equal to each firm’s min ATC
– Production will also occur at this point.

Question 3

– Price will equal to each firm’s min ATC
– Production will also occur at this point.
* This conclusion follows from two basic facts:

Answer 3

1. Firms seek profits and avoid losses and
2. Under perfect competition, firms are free to enter and
   leave an industry.

Question 4

– Price will equal to each firm’s min ATC
– Production will also occur at this point.
* This conclusion follows from two basic facts:

Answer 4

1. Firms seek profits and avoid losses and
2. Under perfect competition, firms are free to enter and
   leave an industry.

Question 5

THE LONG-RUN ADJUSTMENT PROCESS IN PERFECT COMPETITION

Answer 5

Entry eliminates profits (P>ATC)
– Firms enter
– Supply increases – Price falls
Exit eliminates losses (P<ATC)
– Firms exit
– Supply decreases – Price rises

Question 6

In the long run, efficiency is achieved through

Answer 6

• Productive efficiency
  – Goods are produced in the least costly way
  – Producing where P = min. ATC * Allocative efficiency
  – Allocative efficiency is producing the mix of goods most desired by society.
  – Producing where P = MC