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Basic Question 23 of 29
Refer to the graph below. Assuming that the industry continues to operate under conditions of perfect competition and that the cost curves do not shift, in the long run each firm will produce ______.
B. 1000 units of output
C. 1200 units of output
A. 800 units of output
B. 1000 units of output
C. 1200 units of output
User Contributed Comments 15
| User | Comment |
|---|---|
| cbb1 | In the short-run, Price equals the intersection of MC (Marginal Cost) and MR (Marginal Revenue), but in the long-run, Price equals the intersection of Marginal Cost and Average Total Cost. |
| yanpz | Why it's not 1000 units, when MC = MR? |
| yanpz | because in long-term equilibrium, P=MC=ATC |
| Done | Another way to look at it is since the companies are under perfect competition, they are waiting for some to leave the market which will allow supply to fall and the ability to raise prices. |
| danlan | In this graph, P=60 > 50 ,if 60 is for short term and 50 is for long term, then price will fall? |
| mtcfa | Yes price will fall. Done has it backwards. Since in the short run MR > MC , more firms will enter the market, increase the supply thus bringing down the price, and thereby eliminating economic profits. The long run equilibrium will therefore be at P=MC=ATC. |
| magicchip | mtcfa hits the nail on the head!! |
| emongeca7 | Always remember that individual companies will always produce the same 'cause they want to maximize profit. The output for the industry will be higher or lower due to the entry/exit of firms. |
| bundy | Perfect Comp in LR means zero economic profit |
| gill15 | MTCFA has almost nailed it. Short run P=MR=MC which is greater the SRATC and therefor Econ profit ----> More firms enter and the rest MTCFA has correct as well.... |
| sgossett86 | Gill U got EGO man... Are you looking to be a portf mgr? Hedge fund mgr? |
| Shaan23 | Gills comments are pretty sweet. He's clarified a lot of things. |
| Bududeen | All of the above approach are incorrect. Since in a perfect competition firms produced in the short run at P=MR =MC ... Thus the qty is 1000 units. But at this point firms are not producing at the minimum SRAC ... And MC >ATC... This implies that diminishing returns has set in.... The firms are making profits but not maximum profits. Since the extra output produced are detracting from total revenue.... That is the firms are producing at the point at which SRATC is upward sloping. This is an inefficient scale of production ...as can be seen from the nature of the cost curves.. The firms are in an increasing-cost industry... Meaning that increasing output leads to increasing price not fall in price... |
| Bududeen | Thus for the firms to maximize profit they will reduce output in order to reduce cost and eventually leading to a reduce price as the supply curve is upward sloping ... A reduction in output should lead to a reduction in price... I.e. A movement along the supply curve not a shift in the supply curve.... Thus in the long run the firms will produce 800 units and attain maximum profits at the point at which MC is now exactly = ATC and also equals to the minimum point of the LRATC and the corresponding SRATC... |
| schweitzdm | Thanks for the explanation Budu. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
determine and interpret break even and shutdown points of production, as well as how economies and diseconomies of scale affect costs under perfect and imperfect competition
CFA® 2024 Level I Curriculum, Volume 1, Module 1.